China Big 5 Banks Step Up Bad Loan Disposals; Write-Offs Highlight Mounting Debt Risks for Cooling Chinese Economy

China Big 5 Banks Step Up Bad Loan Disposals

Write-Offs Highlight Mounting Debt Risks for Cooling Chinese Economy

March 31, 2014 8:41 a.m. ET

China Construction Bank is one of five large Chinese lenders that wrote off and moved off their books billions of yuan in nonperfoming loans. Reuters

BEIJING—China’s five biggest state-owned banks stepped up their efforts to write off bad loans last year, highlighting mounting debt risks as the economy cools.

The banks— Industrial & Commercial Bank of China, 601398.SH -0.29% China Construction Bank, 601939.SH +0.25% Agricultural Bank of China, 601988.SH +0.39%Bank of China and Bank of Communications 601328.SH -1.05% —wrote off and transferred off their books a total of 63.92 billion yuan ($10.5 billion) nonperforming loans in 2013, according to calculations by The Wall Street Journal. The amount is 2.5 times the 25.29 billion yuan in problem loans they erased from their books in 2012.

The moves to clean up bank balance sheets are another indication of the effects a debt buildup are having on the overall economy. Several high-profile defaults in recent weeks have sounded alarms over deteriorating financial health in the key property sector and other parts of the economy.

Analysts and bank executives warned of more large write-offs this year. “Banks have been under great pressure as a result of decelerating growth in China,” said Moody’s bank analyst Christine Kuo. “This trend is expected to continue this year.”

Four of the five banks managed to report double-digit percentage increases in profits last year. Only Bank of Communications had single digit profit growth at 7%. The profits, analysts said, gave the banks plenty of room to write off the bad loans.

The bad loan disposals came as China’s economic growth slowed to 7.7% last year, down from the pace of 10% or more in recent years. Economists forecast that China faces another year of slower growth—and more bad debts—in 2014.

The slowdown in growth has hampered the ability of many companies to repay borrowings, especially by those struggling with overcapacity problems.

China recorded the first domestic bond default in March when Shanghai-based solar company Chaori Solar Energy Science & Technology Co. failed to make 89.8 million yuan interest payment.

In another sign of financial stress, property developer Zhejiang Xingrun Real Estate Co. said it couldn’t repay $600 million of bank loans.

China’s central bank and its securities regulator have signaled that they are comfortable with modest-sized defaults, seeing them as a way to expose borrowers and lenders to more risk after years of bailouts.

China’s second largest lender—China Construction Bank—said it would be active again this year in writing off bad loans.

Bank of Communications, the fifth-largest lender by assets in China, reported the fastest rise in nonperforming loans last year among the big five banks. The bank wrote off 11.81 billion yuan in bad loans from its books in 2013, more than four times the amount written off a year earlier.

It pointed to risks from the steel trade and attributed its rising bad loans to slower economic growth and industrial restructuring.

Four of the five banks said in their annual reports that they have scaled back lending to the steel and other industries that have been struggling with overcapacity problems—cement and solar panels. The banks—ICBC, Bank of China, China Construction and AgBank—said they reduced their lending to these industries by a total of 66.7 billion yuan last year.

“Industries with overcapacity problems were and will be the main sources of nonperforming loans. These industries including the steel sector will witness a large increase in bad loans in the next two to three years,” said Standard & Poor’s bank analyst Liao Qiang.

Despite the stepped up write-offs in the past year, Mr. Liao said the banks’ outstanding bad loans still rose and would continue to do so as credit becomes tighter. “In 2014, they have to expunge even more to offset the rise in nonperforming loans,” said Mr. Liao.

The five state-owned banks reported a total of 374.32 billion yuan of nonperforming loans last year, up from 327.484 billion yuan reported in 2012. Their average of bad loans to total lending ratio stood at 1.03% at the end of last year—low by international standards.