Top Chinese Banks Post Biggest Bad-Loan Surge Since 2010

Top Chinese Banks Post Biggest Bad-Loan Surge Since 2010

China’s top four banks posted their biggest increase in soured loans since at least 2010 as a five-year credit spree left companies with excess manufacturing capacity and slower profit growth amid an economic slowdown. Nonperforming loans at Industrial & Commercial Bank of China Ltd. (601398), China Construction Bank Corp. (939), Agricultural Bank (1288) of China Ltd. and Bank of China Ltd. (3988) rose 3.5 percent in the three months to Sept. 30 from June to a combined 329.4 billion yuan ($54 billion), according to data compiled by Bloomberg News based on third-quarter results. Profit rose to 209 billion yuan.The rise in defaults adds to concerns bank profitability may decline as policy makers seek to trim production at cement makers to paper manufacturers that have gorged on credit since 2008, while urging lenders to build buffers to cover loan losses. China’s biggest state-run banks are trading near record-low valuations as investors brace for a surge in bad debts and slower credit growth.

“Against the backdrop of a slowing economy and overcapacity problems in some industries, some loans are gradually going bad,” said May Yan, a Hong Kong-based analyst at Barclays Plc. “We will see more bad loans forming because of the legacy of over expansion.”

China in July ordered more than 1,400 companies in 19 industries from steel to paper and cement to cut excess capacity after Premier Li Keqiang pledged to boost efficiency. Rising interest payments are driving some debtors to default on loans taken out during an unprecedented $6.6 trillion credit increase from late 2008 through September.

‘Overwhelm Borrowers’

Interest owed by borrowers has risen to 12.5 percent of Chinese gross domestic product in 2013 from 7 percent in 2008, Fitch Ratings estimated in a report last month. The figure may rise to as high as 22 percent by the end of 2017, which could “ultimately overwhelm borrowers,” the agency said.

ICBC, the world’s most profitable lender, reported yesterday its slowest profit gain in more than four years as lending and fee income growth slowed. Net income rose 7.7 percent to 67.2 billion yuan in the third quarter, missing the 69.4 billion-yuan average estimate of 10 analysts surveyed by Bloomberg News.

Agricultural Bank, the third-largest lender, posted a 15 percent increase in profit for the period to 45.6 billion yuan, in line with the 44.1 billion-yuan average estimate. Bank of China, the fourth-biggest, reported quarterly net income of 39.5 billion yuan, matching analyst forecasts.

‘Intensifying Pressures’

Construction Bank said Oct. 28 its third-quarter profit rose 9.4 percent to 56.8 billion yuan, also matching analysts’ estimates. The four lenders’ combined profits in the period grew 10.8 percent, the slowest pace in seven quarters.

“There are intensifying profitability pressures for the sector on a quarter-on-quarter basis” amid slower lending growth, margin pressure and higher bad debt, said Ismael Pili, head of Asia bank research at Macquarie Group Ltd. in Hong Kong. “Bigger banks such as ICBC and CCB will fare better, with the smaller banks potentially having a harder time.”

Shares of the four banks have dropped by an average 0.7 percent in Hong Kong trading this year, compared with a 2.9 percent increase in the benchmark Hang Seng Index. The lenders are trading at an average 0.93 times their estimated book value for 2014, data compiled by Bloomberg show.

The yield on AAA-rated five-year commercial bank bonds has climbed 80 basis points since the end of June to 5.55 percent, according to an index from Chinabond, the government debt clearinghouse, signaling growing concern that defaults may rise.

China’s top leaders will meet next week to map out economic policies. Gross domestic product growth may slow to 7.1 percent in 2014 from 7.6 percent this year as the government focuses on rebalancing the economy and implementing reforms, Barclays Plc estimated on Oct. 18.

Policy Uncertainty

“There’s a lot of uncertainty on where policy will be heading next year” Liu Jun, a Wuhan-based analyst at Changjiang Securities who has a “hold” recommendation on the industry. “That will reduce the appeal of banking shares even though their earnings growth is quite stable and valuations are low.”

Chinese banks advanced 2.2 trillion yuan of new loans in the third quarter this year, 18 percent higher than a year earlier, according to data from the central bank. Nonperforming loans rose for seven straight quarters through June, data from the banking regulator showed.

The average nonperforming loan ratio of the top four banks rose to 1.02 percent as of Sept. 30, compared with 1.01 percent three months earlier, data compiled by Bloomberg News show.

The nation’s debt-to-GDP ratio, excluding central government and financial debt, widened to 207 percent at the end of the third quarter from 190 percent a year earlier as credit growth continued to outpace productivity gains, Mike Werner, a Hong Kong-based analyst at Sanford C. Bernstein, said this month.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net; Aipeng Soo in Beijing at asoo4@bloomberg.net; Stephanie Tong in Hong Kong at stong17@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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