Newsmax TV & Webwww.newsmax.comFREE - In Google Play
Newsmax TV & Webwww.newsmax.comFREE - On the App Store
Tags: china | banks | default | writeoff

Big China Banks Triple Debt Write-Offs to Brace for Defaults

Wednesday, 23 October 2013 12:57 PM EDT

China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults.

Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its four largest rivals expunged in the first six months 22.1 billion yuan ($3.65 billion) of debt that couldn’t be collected, up from 7.65 billion yuan a year earlier, filings showed. That didn’t pare first-half profits, which climbed to a record $76 billion, as provisions were set aside in earlier periods when the loans began souring.

Erasing the worst of the bad debts may allow the banks to mitigate a surge in nonperforming-loan ratios amid rising defaults in the world’s second-largest economy. China has eased rules for writing off debt to small businesses since 2010 and policy makers are pushing the lenders to increase risk buffers following an unprecedented credit boom that began in 2009.

“The banks and the regulators’ interests are aligned in speeding up write-offs,” said Ma Kunpeng, a Beijing-based analyst at Credit Suisse Founder Securities Ltd. “This prepares them for a rainy day.”

The China Banking Regulatory Commission, led by Shang Fulin, urged banks in April to set aside more funds to cover defaults, write off some bad loans and curb dividend payments while earnings are ample to create a buffer in case of an economic downturn.

Worries about the slowdown have persisted even after expansion of China’s gross domestic product rebounded to 7.8 percent in the third quarter. Growth may slow to 7.6 percent this year, the weakest pace since 1999, according to the median estimate of economists in a Bloomberg survey.

Credit Growth

The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent as credit growth continued to outpace productivity gains, Mike Werner, an analyst at Sanford C. Bernstein & Co. in Hong Kong, wrote in an Oct. 21 note to clients. That’s making investors nervous about bad loans rising at banks, he said.

The five biggest lenders have sought to curb credit risks. By the end of June, they had set aside an average 272 percent of the value of their soured debt as provisions, surpassing the regulator’s 150 percent requirement.

Still, a separate threshold that calls for their loan-loss reserves to exceed 2.5 percent of total credit may become a tougher goal following the debt write-offs — which also reduce provision levels — and force the banks to set aside more funds.

‘Gigantic Reserves’

For ICBC, the loan-loss ratio stood at 2.5 percent at the end of June, while at China Construction Bank Corp., it was 2.63 percent. Not all banks report the figure. Press officers at Beijing-based ICBC and Construction Bank, which is ranked second by assets in China, declined to comment.

Allowing the banks to use their “gigantic” loan-loss reserves to eliminate the worst of the debt indicates that China is beginning to adopt a “more modern approach” to credit management, said Jim Antos, an analyst at Mizuho Securities Asia Ltd. in Hong Kong. Putting the provisions to use — instead of letting them accumulate — may also give investors more confidence in the reported bad-loan figures.

“Every other banking sector in the world does write off loans that are totally uncollectible,” Antos said. “Finally, we see evidence that this is happening in China.”

The next step should be urging banks to move more quickly in reporting that loans have started to sour, he said.

Souring Debts

When a borrower starts facing difficulties with repayments and the loan is classified as nonperforming, the bank sets aside funds in case the debt becomes unrecoverable. The new provisions pare earnings, though the loan remains on the balance sheet while the bank attempts to collect the funds or sell it at a discount. The last resort is writing off the loan, reducing both the reported bad-debt and provision figures.

The five biggest banks — which include Agricultural Bank of China Ltd., Bank of China Ltd. and Bank of Communications Co. — posted a 22.4 billion yuan increase in nonperforming loans during the first half to take the total to 349.9 billion yuan, or 1 percent of total loans, according to data compiled by Bloomberg. They added 83.1 billion yuan to funds set aside as provisions, compared with 72.9 billion yuan in the six months ended June 2012, the data show.

Real Levels

“Banks have an incentive to write off NPLs because that will make their loan books look cleaner,” said Tang Yayun, a Northeast Securities Co. analyst in Shanghai. “The government is also pushing for a faster process to reflect the real level of bad loans, especially when there’s rising pressure on banks to manage their asset quality in an economic slowdown.”

ICBC abandoned efforts to reclaim payments on 6.52 billion yuan of bad loans in the first half, more than double the year-earlier’s 2.5 billion yuan. Its shares have dropped 1.8 percent in Hong Kong this year, compared with a 2.9 percent gain for the city’s benchmark Hang Seng Index.

The practice of writing off loans has been uncommon in China, where banks need to get approval from the Finance Ministry to remove debt from their books. In most cases, a court also has to declare the borrower bankrupt before the lender can seek that permission.

That rule was revised in 2010, when the ministry gave banks authority to write off small-business loans of less than 5 million yuan after one year of collection efforts, without getting approval.

Rising Bankruptcies

China’s courts have also been processing bankruptcies faster. The eastern province of Zhejiang, a region south of Shanghai that’s home to many of the country’s largest private companies, accepted 143 bankruptcy petitions last year, according to the most recent figures reported by its high court in May. That’s almost twice the number from a year earlier.

The rising bankruptcies may have helped Bank of Communications, the nation’s fifth-largest lender, become the most aggressive among the top five in expunging bad loans from its books so far: its write-offs surged sevenfold to 4.82 billion yuan in the first six months. A press officer for the Shanghai-based lender, known as BoCom, declined to comment.

The bank also disposed of 5.1 billion yuan in soured loans through sales to asset-management companies, according to analysts at Sanford C. Bernstein. Without the sales, bad debt would have risen 36 percent in the first half, instead of a reported 17 percent gain, while its bad-loan ratio would have expanded to 1.15 percent rather than the reported 0.99 percent.

The faster pace of write-offs and the sales helped mask the growth of defaults at lenders such as BoCom, said Grace Wu, an analyst at Daiwa Capital Markets Hong Kong Ltd. About a third of BoCom’s loans were made in the Yangtze River Delta region, which includes the troubled Zhejiang province, she said.

‘More Aggressive’

“BoCom’s been seeing more NPL formation compared to the other, larger banks,” Wu said. “In order to try and manage the NPL balance, they have chosen to take on more aggressive write- offs as well as disposals.”

The volume of soured debt at Chinese banks will probably continue to increase in 2014, though the bad-loan ratio may remain “quite stable” as credit growth surpasses the pace of rise in defaults, said Daiwa’s Wu. Almost half of the loans made to local governments won’t come due until 2015, at the earliest, making them “medium-term risks,” she said.

Investors will get their next picture of the biggest banks’ financial health at the end of this month, when lenders publish third-quarter earnings. Construction Bank will report on Oct. 27, with the other four scheduled to follow on Oct. 30. Debt write-offs in the past have been posted only in first-half and full-year reports.

Defaults Rise

Third-quarter net income at the five banks may have risen 11 percent from a year earlier to a combined 226 billion yuan, according to Edmond Law, an analyst at UOB Kay Hian (Hong Kong) Research. Nonperforming loans probably climbed by a “mild” 5 percent in the three months to Sept. 30 as lenders continued to write off or sell bad debt, he wrote in an Oct. 10 report.

Uncertainty about the quality of assets at Chinese banks has made global investors nervous, sending their stocks to near record-low valuations this year. ICBC is trading at 1.01 times estimated book value for 2014 while Construction Bank exchanged hands at 0.97 times, according to data compiled by Bloomberg.

Jim Chanos, the founder of Kynikos Associates Ltd. who predicted the collapse of Enron Corp. in 2001, said last month that he’s maintaining bearish bets on China’s banks. The country will have a “credit event” in the next five years as loan growth begins to slow, he predicted.

Taking the worst soured loans out of the financial system will make the reported nonperforming-loan ratio a more reliable indicator, said Mizuho’s Antos. Allowing bad debts and their provisions to simply accumulate — even after the borrowers have gone out of business — has no value, he said.

“This would be like a fashion company showing as inventory all the unsold items from the last 20 or 30 or 100 seasons,” he said. “Clearly, those dresses will never be sold.”

© Copyright 2022 Bloomberg News. All rights reserved.

China's biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults.
Wednesday, 23 October 2013 12:57 PM
Newsmax Media, Inc.

Sign up for Newsmax’s Daily Newsletter

Receive breaking news and original analysis - sent right to your inbox.

(Optional for Local News)
Privacy: We never share your email address.
Join the Newsmax Community
Read and Post Comments
Please review Community Guidelines before posting a comment.
Get Newsmax Text Alerts

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved
© Newsmax Media, Inc.
All Rights Reserved