China Bank Bad-Loan Buffers Slip in Sign of Profit Pressures

Aug 15, 2014 5:18 am ET

(Updates with analyst’s comment in fourth paragraph.)

Aug. 15 (Bloomberg) -- Chinese banks’ loan-loss reserves fell to the lowest level against soured debt in three years, signaling a looming drag on profits from the need to set aside more money as delinquencies rise.

The bad-loan coverage ratio fell to 262.9 percent as of June 30 from 273.7 percent three months earlier, the China Banking Regulatory Commission said in a statement today. Nonperforming loans have climbed for almost three years, the longest run since the data began in 2004, to reach 694.4 billion yuan ($113 billion). At the same time, soured debt remains only about 1 percent of total credit.

China’s biggest lenders are poised to exit an era of double-digit profit growth as interest-rate deregulation boosts competition for deposits and analysts forecast the nation’s weakest annual economic expansion since 1990. A slump in the property market, overcapacity in industries such as steelmaking, and government efforts to curb shadow banking threaten to trigger more bad loans.

“China needs another two to three years to clean up weak loan portfolios,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia, said in an e-mail. He said the nation is in the midst of a “severe credit shock” even as nonperforming loan ratios remain low.

Banks’ combined net income rose 14 percent to 858.3 billion yuan in the first six months from a year earlier, according to the CBRC data. That compared with a 13.8 percent gain in the first half of last year. Bank of China Ltd. will be the first of the nation’s biggest banks to report second-quarter earnings, on Aug. 19.

Regulator’s Call

CBRC Chairman Shang Fulin last month urged lenders to make adequate provisions and increase write-offs. The banking regulator requires lenders to maintain provisions of at least 150 percent of the value of soured debt or 2.5 percent of total credit, whichever is higher.

Nonperforming loans accounted for 1.08 percent of total lending by June, up from 1.04 percent in March, CBRC data showed. Banks’ so-called special-mention loans, those that may have already become overdue but yet to be categorized as nonperforming, rose 5.4 percent from three months earlier to 1.6 trillion yuan as of June 30, according to the CBRC.

In the eastern province of Shandong, where officials are probing a suspected loan fraud at Qingdao port, nonperforming loans surged 26 percent in the first half to 81.5 billion yuan, according to CBRC figures released July 21. For the five biggest banks, profit in the province fell 6 percent, according to the regulator’s data.

Chinese firms had the most debt globally, including loans and bonds, at $14.2 trillion as of Dec. 31, surpassing the U.S.’s $13.1 trillion, ratings company Standard & Poor’s said in a June 15 report.

Hong Kong-listed Chinese banks are trading at less than forecast book value for this year amid the risk of more soured loans.