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.”

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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