August 28th, 2015 6:12 am
Via the WSJ:
By Chuin-Wei Yap
Updated Aug. 28, 2015 5:19 a.m. ET
BEIJING—China’s biggest lenders are scrambling to clear rising bad loans from their books, as a faltering economy weighs on loan repayments and sets banks on pace for their worst year since they began listing shares 13 years ago.
The pace of profit growth at major lenders from January to June dropped sharply from the first quarter. The sagging performance adds to larger concerns about China’s weakening economy that wreaked turmoil across global markets this week, wiping at least $1 trillion off China’s stock market and sending the Dow Jones Industrial Average to an 18-month low.
Industrial & Commercial Bank of China Ltd. , the nation’s largest lender by assets, said Thursday that its net profit in the first half rose 0.6% to 149.02 billion yuan ($23.27 billion), far below the 7% growth in the same period last year and half the rate of 1.4% in the first quarter.
Agricultural Bank of China Ltd. , the country’s third-biggest bank, posted net profit growth of 0.3% to 104.32 billion yuan, compared with 13% a year ago and 1.3% in the first quarter. Profit at Bank of Communications Co. rose 1.5% to 37.32 billion yuan, compared with a 6% gain a year ago.
Bank of China Ltd. said Friday its first-half net profit rose 1.1% to 90.75 billion yuan, slowing from 11% growth a year earlier.
The sluggish results signal that Chinese borrowers are having trouble repaying loans. Chinese bank profits regularly rose by double-digit percentages—exceeding 60% at their peak in 2007 for ICBC—during China’s post-2008 lending boom. The downswing now is amplified as some of that debt sours.
During that lending binge, banks were encouraged to lend aggressively to state industries and local governments to fend off the global financial crisis. Now, trophy investments in largely empty municipalities known as ghost cities and oversupplied infrastructure aren’t delivering promised returns. Meanwhile, debtors face overcapacity in several industries and slower demand, while land sales are hit by a weakened property market.
“A rebound in nonperforming loans seems to be the key reason for the earnings slowdown, which in turn is affecting banks’ internal capital replenishment capacity,” said Sophie Jiang, Nomura banking analyst.
New data suggest to many economists that China could have trouble hitting its growth target for the year of about 7% from a year ago, already the slowest pace in 25 years.
Chinese banks maintain a squeaky-clean level of toxic debt on their books. ICBC said its bad-loan ratio, which measures nonperforming loans as a percentage of total loans, reached 1.4%, compared with 1.29% at the end of March. Bank of Communications posted 1.35%, a rise from 1.3% three months earlier. Agricultural Bank reported 1.83%, up from 1.65% in the first quarter.
These levels are low by global standards, but few analysts believe the rate accurately reflects asset quality among lenders. Valuations of Chinese banks provide a better clue to worsening bad-loan levels, analysts said.
“The banks’ share prices acknowledge there is way more uncollectable debt on their books than they now acknowledge,” said Anne Stevenson-Yang, director of J Capital Research in Beijing.
ICBC’s Hong Kong-listed stock is trading at 0.8 times its book value, a measure of net worth, from 2.9 times book value in 2009. Bank of China Ltd.’s price-to-book ratio has fallen to 0.68 from around 1.8 in 2009. Investors use the indicator to gauge potential problems in the company.
The first-half reports show banks have been scrambling to throw out bad debt. ICBC wrote off 31.3 billion yuan of bad loans, more than double 12.7 billion yuan of a year earlier. AgBank’s write-offs reached 15.4 billion yuan in the period, from 11.8 billion a year ago.
Though banks’ data suggest nonperforming loans are inching up only slowly, another measure suggests troubled loans are mounting. Special-mention loans, a category that banks deem overdue but not yet impaired, are rising. Analysts say these loans are often just soured loans that lenders haven’t acknowledged yet.
At the end of June, ICBC reported 420.4 billion yuan of special-mention loans, nearly three times more than its nonperforming loans and accounting for 3.6% of total loans. A year ago, the bank reported just 231 billion yuan of special mentions, or 2.1% of loans.
“The market believes that there is a lot more bad loans under the hood,” said Oliver Barron, head of research at investment bank North Square Blue Oak.
As worries loom, lenders have been increasing provisions, but these buffers can’t keep pace with the proliferation of bad loans. ICBC set aside provisions that were 1.63 times as large as their bad-debt levels in the first six months, down from 2.4 times in the same period last year—a sign that it is struggling to insulate itself, analysts say. Provisions at Agricultural Bank reached 2.39 times the level of bad debt in the January-June period, slipping from 3.46 times a year earlier.
Major banks last year wrote off more than twice the bad loans they did in 2013.
China Construction Bank Corp. is expected to report its first-half results Sunday.