 "Photo credit: Wikipedia")
Two of China’s biggest banks, Industrial & Commercial Bank of China and China Construction Bank, are testing their regulator’s tolerance by protecting profits at the expense of bad-loan buffers.
ICBC and Construction Bank both reported loan-loss coverage ratios below a regulatory minimum of 150 percent of existing nonperforming loans when they disclosed third-quarter earnings.
So far, China’s lenders haven’t faced any significant penalties for letting the buffers slip as they “scramble” to maintain profits in the face of increased levels of bad loans, according to Chen Shujin, a Hong Kong-based bank analyst at DBS Vickers.
If the banking regulator pressed ICBC, the most persistent offender, to quickly get its ratio back up to 150 per cent, the lender might need to step up disposals of bad debt and could face a big hit to profit. No comment was immediately available from the China Banking Regulatory Commission on Friday.
While the banking regulator has been “tolerant” of breaches of the requirements, which are high by global standards, banks may be forced to conform after grace periods, Chen said. In a sign of the pressure on lenders, the combined profit of China’s five biggest banks rose 0.8 per cent in the third quarter from a year earlier, the smallest gain in three quarters.
ICBC’s coverage ratio stands at 136.1 per cent, while Construction Bank’s is 148.8 per cent. Bank of China has clambered back above 150 per cent and Agricultural Bank of China, the fourth of the nation’s big banks, is also above that level.
The banking regulator has resisted lobbying by the big lenders to lower the minimum ratio, people with knowledge of the matter said in July. The CBRC instead urged banks to take steps to restore their buffers, said the people, who asked not to be named discussing private information.
ICBC’s breaches this year prompted the central bank to deduct points from its metrics under the so-called Macro Prudential Assessment framework, a measure of the health of Chinese banks, Caixin reported this month.
The CBRC can take more serious action. Suspending branch openings and some of a bank’s operations, requiring changes in management, and limiting dividend payouts and asset sales are all options when a lender leaves the coverage ratio below 150 per cent for more than six months.
More than a decade of profit growth at Chinese banks is threatened by slowing growth and an accompanying rise in nonperforming loans, hurting their ability to return money to shareholders.
A bad-loan coverage ratio of about 120 per cent to 130 percent would be “reasonable” and “possible,” the chairman of Construction Bank, Wang Hongzhang said in April. Bank of China argued around the same time that China’s bad-loan buffers compared with an average of about 79 per cent for global systemically-important banks.
