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Tags: Profits | Chinese | Banks | Defaults

Record Profits at Chinese Banks Marred by Loan Defaults

Wednesday, 21 March 2012 08:30 AM EDT

China’s biggest banks, set to post record profits for a fifth year, may report 2011 results marred by an increase in bad loans as an economic slowdown and faltering property market trigger defaults by borrowers.

Industrial & Commercial Bank of China Ltd., the world’s most profitable lender, and its four biggest local rivals may post a 15 percent increase in combined fourth-quarter net income when they report this month, according to analyst estimates compiled by Bloomberg. Their non-performing loans rose for the first time since the third quarter of 2008, the banking regulator said last month.

China’s efforts to bolster banks’ risk buffers and curb inflation following a two-year, $2.7 trillion credit boom have pushed up funding costs, slowed the economy and triggered defaults, prompting Standard & Poor’s to warn March 12 that a jump in bad loans may curb profitability. Fresh evidence of mounting defaults may clip the average 42 percent rally in shares of the banks in Hong Kong over the past five months.

“It’s time to take profits off the table,” said May Yan, a Hong Kong-based analyst at Barclays Capital Inc., who cut her rating on the industry to “neutral” last month, citing weakness in the economy and banking sector. “The rebound of NPLs is not temporary. It’s the beginning of a worrisome trend.”

Rising Bad Loans

Non-performing loans at Hong Kong-listed Chinese banks, which include Beijing-based ICBC, China Construction Bank Corp. and Agricultural Bank of China Ltd., may rise an average 40 percent in 2012, Yan forecast. The bad-loan ratio at the five biggest banks could climb to about 1.9 percent in 2013 from 1.1 percent in 2011, she said.

The economy expanded 8.9 percent last quarter, or at the slowest pace in 2 1/2 years, as Europe’s debt crisis curbed export demand and the property market weakened. The slowdown has extended into this year, with factory output in the first two months rising the least since 2009, while home prices posted the worst performance in a year, data showed this month.

Still, China’s 3,800 banks had fourth-quarter net income of $35.4 billion, a third more than the total earnings of 7,357 U.S. lenders including Bank of America Corp. and JPMorgan Chase & Co., data from the China Banking Regulatory Commission and the Federal Deposit Insurance Corp. showed. The five largest Chinese banks accounted for 139.5 billion yuan ($22 billion) of profit, according to the analysts’ estimates.

Roads, Bridges

The earnings have been driven by accelerated loan growth after China’s government unveiled a 4 trillion-yuan stimulus package to bolster the economy following a slump in global equity and credit markets in 2008. That triggered an explosion in credit to local governments and property developers, and a surge in investments in infrastructure such as roads and bridges.

A year after the boom ended in 2010, defaults began to climb. Bad loans at China’s five largest banks rose to 299.6 billion yuan as of Dec. 31, from 287.9 billion yuan at the end of September, according to data from the regulator in February. The non-performing loan ratio remained at 1.1 percent, it said.

The actual increase in defaults is probably higher than the official data because lenders write off the worst assets at the end of the year, China International Capital Corp. analysts Mao Junhua and Luo Jing wrote in a note last month.

Missed Repayments

Mountain China Resorts Holdings Ltd., a partner of Club Mediterranee SA in China, said last week that it failed to repay 30 million yuan of bank loans on time. Shandong Helon Co., the fiber maker that in December became China’s first company to lose its investment-grade credit rating, missed 397 million yuan in loan payments in January.

Publicly traded Chinese banks’ bad loans may jump 26 percent this year as the economy slows, while profit growth will be cut by almost half, to 15 percent, and the average net interest margin may shrink 4 basis points from last year’s 2.7 percent, CICC forecast. A basis point is 0.01 percentage point.

“We are monitoring the NPL trend very, very closely, but it’s far from the stage of sending everybody into a panic,” said Yang Jianxun, a Shenzhen-based fund manager at Dacheng Fund Management Co., which oversees the equivalent of $12.7 billion. “The problem will be contained and banks’ valuations are still attractive from a long-term perspective.”

Shenzhen Development Bank Co., the first Chinese lender to report full-year earnings, posted a 26 percent increase in fourth-quarter non-performing loans following increased lending to smaller businesses, which have higher default rates, President Richard Jackson said on March 8.

Bankruptcies, Suicides

Among its branches, the ratio is the highest in Wenzhou, reflecting the difficulties faced by entrepreneurs in the coastal city, the bank said. More than 80 indebted businessmen in the small exporters’ hub disappeared, committed suicide or declared bankruptcy from April through September because of loans due to informal lenders, the official Xinhua News Agency said in October.

Property companies listed in China and Hong Kong face a worse cash shortage this year than in 2008, when China’s house prices fell for the first time since people were allowed to own homes, CEBM Group Ltd., a Shanghai-based investment advisory firm, said in January.

Residential prices will need to see a “meaningful correction” by falling 20 percent to 30 percent from last year’s peak before the government relaxes property rules, Qu Hongbin, an economist at HSBC Holdings Plc, said on March 19.

May Avert Crash

Prices may post a “single-digit” decline this year, billionaire developer Vincent Lo, chairman of Shui On Land Ltd., said in an interview in Beijing on March 8. The market won’t see a crash, he said.

Premier Wen Jiabao, who this month pared the 2012 economic growth target to 7.5 percent, said home prices remain far from a reasonable level and relaxing restrictions on sales could cause market “chaos.”

While Chinese banks’ bad debt have increased, total lending is growing faster. The ratio of non-performing loans to total credit should be “stable” after lending grew 15.8 percent last year, Morgan Stanley predicted in a March 7 note.

Agricultural Bank, the nation’s third-largest lender, may report tomorrow that fourth-quarter profit rose 16.6 percent to 28.84 billion yuan, according to a Bloomberg survey of analysts.

Construction Bank, the second-largest, is set to report a 29 percent gain on March 25. ICBC may say on March 29 that earnings rose 14 percent while Bank of China Ltd., ranked No. 4, will probably post a 2 percent increase in profit. The four banks are all based in Beijing.

Lower Valuations

Shanghai-based Bank of Communications Co., the fifth- largest lender, may post a 6.9 percent increase in net income on March 28.

The five banks are trading at an average 6.1 times their estimated earnings in 2012, compared with 9.5 times at New York- based JPMorgan and 13.8 times at Charlotte, North Carolina-based Bank of America, according to data compiled by Bloomberg.

Standard & Poor’s warned last week that China’s banks could face a slump in earnings growth in 2012 due to a slowing economy, falling property prices and the challenges of refinancing “sizable” local government debt.

The banks’ reported bad-debt ratio tied to local government financing vehicles is “not possible” unless they’re rolling over debt, said Liao Qiang, a Beijing-based S&P analyst. He estimated last year that as much as 30 percent of loans to such entities may sour without central-government support, and will probably be the biggest source of non-performing assets for the industry.

Local Governments

Yunnan Highway Development & Investment Co., a financing vehicle of the southwestern province, in April told creditors including Construction Bank and ICBC that it wouldn’t be able to make principal payments on about 100 billion yuan of loans, Caixin Online reported in June. The provincial government later promised to assume payment.

In northern Liaoning province, about 85 percent of local government financial vehicles didn’t have sufficient income to pay principal and interest payments on debt due in 2010, Caixin said in September, citing a speech by the head of the provincial audit office.

China’s first audit of local-government borrowing showed 80 percent of their 10.7 trillion yuan of debt at the end of 2010 was bank loans and more than half will mature in 2011- 2013. More than 35 billion yuan of money borrowed for local development went into the stock and property markets or prohibited projects, the audit showed.

The credit boom also sapped lenders’ finances. BoCom said last week it plans to raise 56.6 billion yuan in a private placement to boost its core capital adequacy ratio above the 9.5 percent minimum required under the new capital rules. Agricultural Bank’s core capital ratio at 9.36 percent as of Sept. 30 was also below the mandatory minimum.

© Copyright 2022 Bloomberg News. All rights reserved.

Wednesday, 21 March 2012 08:30 AM
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