China’s biggest banks reported a surge in soured and castoff loans in the first half of the year, as China’s slowing growth has taken a toll on its lenders. According to data from China Banking Regulatory Commission (CBRC), non-performing loans throughout the country’s banking system grew by 102.3 billion yuan (US$16.6 billion) in the first half of this year to 694.4 billion yuan (US$113.1 billion), exceeding the 99.2 billion yuan increase for all of last year.
The top four state-owned banks, Bank of China, Agricultural Bank of China, Industrial & Commercial Bank of China, and Bank of Communications contribute to about half of the overall net profit in China’s banking sector.
A report in China Times on Aug. 30 said outstanding non-performing loans at these four banks increased by 38.72 billion yuan at the end of June. Among them, Bank of Communications’ non-performing loans increased by 4.44 billion yuan since January. Its bad-loan ratio rose to 1.13 percent at the end of June compared with 1.05 percent at the end of 2013, pushing it above the 1.08 percent average industry level reported by China’s banking regulator, the CBRC.
Subsequently, Bank of China, Agricultural Bank of China, and Industrial & Commercial Bank of China posted that their non-performing loans increased by 12.58 billion yuan, 9.69 billion yuan, and 12.05 billion yuan, respectively during first six months of 2014.
Yi Huiman, President of Industrial & Commercial Bank of China (ICBC) reported the bank wrote off 12.7 billion yuan of bad loans, nearly double the 6.5 billion yuan of a year earlier, and the bank also sold off 4 billion yuan worth of non-performing loans in the first half.
Tian Jimin, a risk-control official at the Agricultural Bank said at a briefing the bank wrote off 6.9 billion yuan in bad loans and sold an additional 8.3 billion yuan worth to entities such as asset-management companies. The write-offs were more than double the 3.34 billion yuan from a year earlier.
According to the Wall Street Journal, the Bank of Communications said it wrote off a total of 4.04 billion yuan in bad loans in the first six months of the year.
Overall, the five biggest state-owned banks in China wrote off and transferred out of their books a total of 46.91 billion yuan of bad loans in the first half, according to calculations by The Wall Street Journal. That is more than twice the 22.07 billion yuan from a year earlier and marks an effort to clean up their books amid the prospects of more bad loans.
Due to the increase in stressed loans, banks have sought to boost their capital adequacy ratio by issuing preference shares. On Thursday, ICBC Chairman Jiang Jianqing said at a media conference the bank could issue up to 35 billion yuan (USD$5.7 billion) of overseas preference shares within the year. The bank had previously mentioned plans to issue up to 80 billion yuan of preference shares, split between onshore and offshore tranches.
Agricultural Bank gained approval from CBRC to issue 800 million preferred shares worth up to 80 billion yuan, while the Bank of China was approved to issue 600 million onshore preferred shares worth up to 60 billion yuan as well as US$6.5 billion worth of preferred shares in an offshore offering, the bank said in filings posted on the Hong Kong stock exchange website on Thursday night.
Banks said the increase in soured loans is coming from the steel, manufacturing, and small-business sectors, which have been hit most by China’s slowing economic growth. According to Xu Wenbing, a senior analyst at Bank of Communications, these will continue to make up the majority of bad loans, and he predicts China’s bad loan ratio will increase to between 1.14 percent and 1.19 percent by end of this year.
Other experts have echoed Xu’s opinion, expecting bad loans to keep creeping upward. Among them, Standard & Poor’s bank analyst Liao Qiang voiced his concern, “Asset quality of Chinese banks is still under downward pressure, and we haven’t seen when it could bottom out … It is very likely that the deterioration could accelerate in the future.”