Diminishing hopes that the industry could start to put the worst of China debt problem behind it next year while the non-performing loan (NPL) ratio is still climbing, China’s big five banks are losing money from writing off bad debt at a rate faster than they have been able to earn profits or raise capital this year.

The average NPL ratio at the national “big five” has climbed back to 1.72 per cent, up from 1.69 per cent recorded by the China Banking Regulatory Commission at the end of June and was led by the Agricultural Bank of China, which set the industry record for worst NPL ratio of 2.39 per cent. A brief hiatus from what seemed to be an improvement from earlier figures had preceded the increase.

Compared to the 776.9 billion in net profits and 1.8 trillion yuan in new capital they raised mostly through bond and rights issues so far in 2016, the total losses from bad assets at the big five amounted to 273.7 billion yuan ($40 billion) in the nine months ended September.

Banks are reporting a 54.6 per cent higher bad loan loss figure compared to a year ago, partly because of central government pressure to fix the bad debt issue.

At the same time, when excluding a one-off 9.9 per cent gain by Bank of China from a series of internal asset transfers within its Hong Kong business, the net profits came in flat, reaching an average of just 0.89 per cent.

“If ICBC could begin to show it is stabilizing on its level of non-performing loans formation, we could start to confirm the thesis that we are to see a peak on the non-performing loans issue in the banking industry next year,” said Shujin Chen, research director at DBS Vickers.

Up from 1.55 per cent in June, a jump in its NPL ratio to 1.62 per cent at the end of the third quarter was reported by the bank which is by far the nation’s biggest by assets.

By lowering its bad debt provision level to 136 per cent, down from the previous 143 per cent, ICBC also took the lead in testing the government’s regulatory line. Against their balance of bad debt, a minimum of 150 per cent more capital is expected to be held by China’s banks.

While Bank of Communications’ provision level stood at 150.3 per cent, provision below the requirement were also lowered by China Construction Bank, the nation’s next bigger player, although only to 148.8 per cent.

Banks with higher NPL ratios kept well above the line in comparison. While Bank of China, the bank that led the biggest debt write-offs at 64 billion yuan this year, was at 155.8 per cent, Agricultural Bank of China said its provision was at 172.7 per cent.

“The provisions go down when the balance of the banks’ non-performing loans increase or if they write off more assets, which would wear off the reserves,” said Chen.

“[The People’s Bank of China] has been using price measures to change banks’ behaviour. But the price impact has not been especially strong. Compared to the central bank, the China Banking Regulatory Commission could be more concerned about the provisions level. It does not have a very clear guidance on the matter [when banks drop below the required ratio],” Chen said.

(Adapted from CNBC)

Categories: Economy & Finance