ICBC chairman sees inevitable rise in China bad loans

Last updated: November 20, 2013 6:14 pm

ICBC chairman sees inevitable rise in China bad loans

By Simon Rabinovitch and Paul J Davies in Beijing

The head of China’s biggest bank has warned that bad loans will inevitably rise and weaker lenders will be wiped out as the government relaxes its grip on the economy. But Jiang Jianqing, chairman of Industrial and Commercial Bank of China, the country’s largest lender by assets, also hit back at those foreign critics who have raised questions about the resilience of China’s banks after the lending spree that powered the country through the 2008 global financial crisis. ICBC was prepared for the challenges and should not be held to impossibly high standards, he said.“You shouldn’t place such high demands on other people’s children,” Mr Jiang said. “You should look after your own children.”

Mr Jiang told the Financial Times in an unusually blunt interview that the bank’s current non-performing loan ratio of 0.91 per cent was “excessively good” and was bound to increase as ICBC extends more credit to riskier borrowers such as small companies and households.

Bad loans have started to rise for the Chinese banking sector overall. They increased by the largest amount in eight years in the third quarter, though as a portion of industry-wide loans they are still very low at less than 1 per cent.

“Look at other major international banks. Their [bad loan ratios] are 1 per cent, 2 per cent or higher, but no one requires more of them. For China, the expectations are too high,” said Mr Jiang, who has headed ICBC since 2000.

“The world seems to think that Chinese banks have to keep their bad loan ratio at less than 1 per cent and that we have to keep lowering it year after year. Can we really cut it to zero? That’s not economically possible,” he said.

Mr Jiang, responding to investor concerns that China’s banks are understating the true level of non-performing assets, also rejected any suggestion of data manipulation. “We have made a supreme effort to disclose all information at regular intervals to analysts and investors.”

He said the risks of loans to the property sector and local governments – which are fuelling gloomy forecasts for Chinese banks – are under control. As an example, he noted that mortgages only accounted for about half of home payments, with the rest made up front in cash.

Mr Jiang said the bigger problem for asset quality was a shift away from lending to bigstate-backed companies to smaller private companies, a transition the government has encouraged. These loans are “high return and high risk”, he said.

He added that an accelerated pace of interest rate deregulation posed another serious challenge, squeezing the guaranteed margins Chinese banks have traditionally enjoyed. With the government also vowing to let failing banks go under, Mr Jiang said lenders would no longer be able to count on state support.

“If you do badly, you will be eliminated,” he said. “The key thing is whether provisioning is sufficient, and our provision level is excellent.”

ICBC’s reserves stand at 269 per cent of its current level of bad loans, down 19 basis points from a quarter earlier but still nearly double the regulatory minimum.

After exceptionally strong profit growth over the past decade, investors have priced in a much bumpier future for Chinese banks. The forward price-to-book ratio for the country’s banking sector – a gauge of market expectations – has fallen to 0.9 from 1.6 in 2014.

Mr Jiang threw up his hands when asked what ICBC could do to win over sceptical investors. “We’ve had excellent results that have stood the test of time and have continually given investors good returns. It’s hard to find banks like that elsewhere in the world,” he said. “We often run into markets that aren’t rational, that are influenced by unreasonable, unprofessional factors. But I believe this situation cannot persist forever.”