Bank of China Doubles Money Set Aside for Looming Bad Loans

Aug 19, 2014 10:09 pm ET

(Update shares in seventh paragraph.)

Aug. 20 (Bloomberg) -- Bank of China Ltd. more than doubled its money set aside for bad loans as profit growth cooled to the slowest pace in five quarters on weakness in the economy.

Provisions for potential soured debt climbed to 12.7 billion yuan ($2.1 billion) in the second quarter, up 116 percent from a year earlier, based on half-year figures released by the Beijing-based company yesterday. Net income rose 8.5 percent to 44.4 billion yuan, the earnings statement showed.

The nonperforming loans of China’s fourth-largest bank surged to 85.9 billion yuan, the highest in more than five years, as companies struggled with repayments in an economy at risk of the weakest full-year growth since 1990. The nation’s lenders are already trading at the cheapest price-to-earnings valuations of global banks.

“The biggest concern for Bank of China is their asset quality,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research, said by phone. “The trend is very obvious. We expect nonperforming loans to continue rising in the next two quarters.”

The bank’s net income compared with the 44.9 billion-yuan median of 10 estimates in a Bloomberg News survey. Its net interest margin, a measure of lending profitability, narrowed to 2.27 percent at the end of June from 2.29 percent at the end of the first quarter. Nonperforming loans amounted to 1.02 percent of total advances, up from 0.98 percent in the previous quarter.

Economic Outlook

At a briefing in Beijing, President Chen Siqing said the company had stepped up efforts to dispose of bad credit, adding that the economy faced downward pressure in the second half of the year. Gross domestic product may expand 7.4 percent this year, a Bloomberg survey shows.

Shares of Bank of China fell 0.3 percent to HK$3.67 as of 9:47 a.m. local time in Hong Kong. The stock trades at about 5 times estimated profit for 2014, less than half the benchmark Hang Seng Index’s 11.6 times, data compiled by Bloomberg show.

Gluts in industries such as coal and sliding home prices show the risk of bad loans spiraling. Bank of China and other Chinese lenders have this year proposed selling a record $63 billion of preferred and common stock to meet stricter capital requirements that will give them bigger buffers.

Income Gain

Bank of China’s net income rose 11.2 percent to 89.7 billion yuan in the first half, according to yesterday’s statement. Net interest income increased 14 percent to 156.7 billion yuan, while net fee income from services such as credit cards and bond underwriting rose 14.6 percent to 52.1 billion yuan.

The lender’s yuan-denominated business is facing some pressure, which is largely offset by fast-growing overseas and domestic business conducted in foreign currencies, Victor Wang, a Hong Kong-based analyst for Credit Suisse Group AG, wrote in a note today. The bank’s performance remained strong, with bad loans “within expectations” and costs under tight control, Wang said.

China’s five biggest banks -- Industrial & Commercial Bank of China Ltd., Bank of China, Agricultural Bank of China Ltd., China Construction Bank Corp. and Bank of Communications Co. -- may report a 7 percent increase in combined net income to 924 billion yuan this year, according to analysts’ estimates compiled by Bloomberg. That would be the smallest gain in more than a decade.

Capital Buffer

Bank of China’s bad loans increased 17 percent from the end of last year. The lender had 8.4 trillion yuan of loans outstanding as of June 30, up 11 percent from the end of last year. The lender’s capital adequacy ratio, a measure of financial strength, was 11.8 percent, down from 12.5 percent in December. Its Tier-1 buffer was 9.37 percent.

Under China’s implementation of Basel III rules, systemically important banks need a minimum Tier 1 capital ratio of 9.5 percent, with total buffers of 11.5 percent, before the end of 2018.

State-run lenders are bracing for more competition under President Xi Jinping’s plans to give markets a bigger role in the economy.

The government’s planned revamp of the financial industry includes ending an interest-rate system that buoyed profits at the biggest lenders by creating a margin of about 3 percent between what they paid for one-year deposits and charged for loans. The central bank scrapped a floor on lending rates in July last year and intends to remove a cap on deposit rates within one to two years, Governor Zhou Xiaochuan said in March.

The China Banking Regulatory Commission in July approved companies including Tencent Holdings Ltd. to establish three privately owned lenders. The country also plans “mixed-owership reform” for state banks, the National Business Daily this month cited CBRC Chairman Shang Fulin as saying.

--With assistance from Aipeng Soo in Beijing and Alfred Liu in Hong Kong.