China Citic Seeks Shareholder Approval to Write Down Bad Loans

China Citic Seeks Shareholder Approval to Write Down Bad Loans

Move to Write Down Over Half Billion Dollars in Bad Debt May Be a Warning to Markets

DINNY MCMAHON And CYNTHIA KOONS

Updated Dec. 12, 2013 11:20 a.m. ET

BEIJING— China Citic Bank Corp. 601998.SH -0.74% plans to ask shareholders for permission to write off close to $900 million of nonperforming loans, an unusual move as China’s bad-debt levels start to tick upward. The bank, China’s seventh-largest by assets, said in statements on the Hong Kong Stock Exchange this week that it wants to more than double the amount of loans it can write off in 2013 to 5.2 billion yuan ($852 million), up from a previously planned 2 billion-yuan write-off.The bank said the move was necessary because the amount of nonperforming loans had increased “remarkably” this year because of economic downturn in China. Citic’s balance of nonperforming loans rose 43% to 16.99 billion yuan from the start of the year through October. Writing off the bad debts will help the bank dispose of nonperforming loans and improve asset quality, the bank said in a statement.

Citic said the write-off will offset tax expense for the year and increase profit. Still, it was unclear why the write-off was being put to a shareholder vote. Analysts said banks rarely ask shareholders to endorse a bad-loan write-off. Citic didn’t respond to a request for comment.

Nonperforming loans at China’s banks have remained doggedly low, hovering around 1% on their books, despite a slowing economy and widespread overcapacity in industries ranging from steel to textiles. Investors are broadly skeptical of the low level of nonperforming loans reported by China’s banks, in part because lenders often extend or restructure loans rather than admit that they’ve gone bad.

Chinese bankers have warned that bad-loan levels are set to rise. According to May Yan, a banking analyst with Barclays, BARC.LN -2.23% new nonperforming loans rose 35% in from January to June, although bad debt as a portion of total loans remains small. Bad debt isn’t rising uniformly throughout the country, analysts say. The export hubs of Jiangsu and Zhejiang, hit by anemic growth in traditional markets and a particularly rapid run up of debt in recent years, are seeing the sharpest increase.

Citic Bank was one of the first of China’s publicly traded lenders to start showing stress from the slowing economy. After posting robust double-digit profit growth for years, Citic’s profit grew in 2012 by only 0.7%, in part due to a 4 billion-yuan provision made for bad loans.

Still, Citic isn’t the first Chinese bank to ask shareholders for their approval on bad-debt write offs. In 2011, China Minsheng Banking Corp. 600016.SH -0.48% and Shanghai Pudong Development Bank Co. 600000.SH -0.50% both asked their shareholders to vote, albeit on much smaller amounts. Minsheng asked to dispose of 376 million yuan of soured credit and Pudong Development for 147 million yuan worth.

People familiar with the process say writing off loans is complicated, with China’s Ministry of Finance requiring banks to first seek its approval. Typically, banks need to show that they have done everything in their power to collect the debt, according to people involved in China’s distressed debt market.

Few other banks have announced significant write-downs, aside from Bank of Tianjin, which in November disclosed plans to spin off more than 900 million yuan of loans. The amount exceeds the total for nonperforming loans the bank said was on its books at the end of last year.

At the end of September, Citic Bank’s nonperforming loan ratio was only 0.9%.

Efforts to guard against bad loans is likely to continue taking a toll on Citic Bank’s profit. Beijing requires that banks maintain provisions against bad debts of no less than 2.5% of their total loans. At the end of September, Citic Bank’s ratio stood at 2.09% of its total loans. China Citic Bank President Zhu Xiaohuang said in March that the bank would continue to set aside cash to increase its provisions to meet the target.