China’s Biggest Banks Prepare for Hard Times

(Bloomberg) -- China’s largest banks eked out higher profits but signaled tougher times ahead, shedding bad loans and boosting provisions as the economy shows signs of deterioration.

Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp. reported declines in their nonperforming loan ratios in the third quarter while strengthening buffers against souring debts.

The results come as the Chinese economy expanded at the slowest pace since the early 1990s and the trade war spills into new areas including finance. The outlook remains challenging as efforts to boost growth and help struggling small businesses threaten to squeeze margins and lead to a pileup of bad debt.

Read More: China Bankers See Bad Loans Rising Toward a Peak in 2020

China cleaned up 1.4 trillion yuan ($198 billion) of nonperforming loans in the first nine months, nearly 177 billion yuan more than in the same period last year, Huang Hong, vice chairman of the China Banking and Insurance Regulatory Commission said last week.

Chinese banks reported 2.2 trillion yuan of nonperforming loans at the end of June, the highest in at least 15 years, according to the regulator. Xiao Yuanqi, its chief risk officer, said last week that the industry is particularly vulnerable to bad debts and that authorities are working to ensure banks report the true value of nonperforming advances.

China’s Biggest Banks Prepare for Hard Times

Efforts to clean up lenders’ balance sheets will continue “amid subdued economic growth and ailing corporate solvency,” CCB International Ltd. analysts led by Lawrence Chen wrote in a note this month.

China recently revamped its system of interest rates to make them more market-oriented. The new market benchmark, the Loan Prime Rate, will be determined by submissions from a panel of 18 lenders rather than set by the central bank. In the short term, that may mean thinner margins as demand for credit in a slowing economy lessens.

Shares of the top four banks have lost an average 3.6% in Hong Kong this year, trailing the benchmark Hang Seng Index and sending their valuations to near-record lows.

Earnings highlights for the third quarter:
  • ICBC profit increased 5.8% to 83.8 billion yuan. Its bad-loan ratio fell a fraction from the end of 2018 to 1.44%, while its bad-loan provision ratio increased 22 percentage points to 198%
  • AgBank profit increased 6.1% to 59.2 billion yuan; bad loan ratio decreased slightly from end 2018 to 1.42%; provisions for nonperforming loans increased 29 percentage points from the end of 2018 to 281%
  • BoC profit increased 3% to 45.5 billion yuan. Its bad-loan ratio fell slightly from 2018 year-end to 1.37%, while its bad-loan provision ratio increased 0.27 percentage point from the end of 2018 to 182.24%
  • CCB profit rose 6.1% to 71.2 billion yuan. Its bad loan ratio dipped 0.03 percentage points from end 2018 to 1.43%, while the ratio of allowances to non-performing loans climbed 9.91 percentage points this year to 218.3%.

©2019 Bloomberg L.P.

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