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Major Chinese banks increase loan loss provisions amid slowing economy


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Major Chinese banks increase loan loss provisions amid slowing economy

Most of the largest banks in China increased their provisions against bad loans while asset quality improved, highlighting the uncertainty on credit risk ahead as the world's second-largest economy slows.

Agricultural Bank of China Ltd., Bank of Communications Co. Ltd., and Postal Savings Bank of China Co. Ltd. reported a year-over-year increase of between 4.12% and 13.84% in their loan loss provisions in the three months ended Sept. 30. Meanwhile, Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. said their total provisions, which cover loans and other assets, rose 0.92% and 5.02%, respectively.

China Construction Bank Corp. was the only large state-backed commercial bank that reported a drop in loan loss provisions, down 32.47% in the third quarter from a year earlier. The bank said in an Oct. 29 statement the decline was due to the impact of rectification of legacy wealth management business on provisions, but it did not elaborate. The lender could not be reached for further comment.

"The banks are probably being prudent in maintaining these provisions for the time being," said Daryl Liew, chief investment officer at Reyl Singapore, a wealth and asset management firm.

The Chinese economy is set to grow more slowly after it expanded 4.9% in the September quarter, compared with 7.9% in the previous three months. Economists said the slowdown is due to China's latest measures to curb home prices and the lending practice of developers, strict border control and lockdown policy amid recurring COVID-19 outbreaks and various policies to address inequality under its national objective of 'common prosperity.’

"As such, there are questions over whether business activity for all sectors can truly normalize with such a policy stance," Liew said. "Hence, I believe these provisions could remain in place until this changes."

Asset quality of China's six largest state-backed lenders also improved in the third quarter. The average nonperforming loan ratio decreased to 1.37% as of Sept. 30, compared to 1.45% as of end-2020.

Property sector's ringfenced risks

In recent months, there have been concerns about borrowers' ability to make repayments, in particular in the real estate sector, after debt crises at China Huarong Asset Management Co. Ltd. and China Evergrande Group. However, such risks are unlikely to spillover to China's major lenders, analysts said.

"The overall risk from real estate could be limited," said Avishek Suman, Beijing-based head of investment research, China at Acuity Knowledge Partners, a research and analytics firm.

"Banks' real estate-related NPL ratio increased in the first half of 2021, and pressures from policies on the real estate sector are expected to remain, forcing banks to optimize their quality of assets in the fourth quarter," Suman said.

Currently, all big domestic banks are actively complying with instructions from the government, Suman said, and banks have promised to implement more stringent audit standards for new projects.

"As for the problems banks are already exposed to, they would evaluate and recognize the impairment in advance to minimize risks," Suman said.

Near-term contagion risk from problem sectors is likely contained due to improved interbank liquidity, accelerated mortgage disbursement and an extension of credit, said Bruce Pang, Hong Kong-based head of macro and strategy research at China Renaissance, a financial institution.

"China banks are mostly resilient to risks specific to property-related loans, in our opinion, unless the situation triggers broader stress in areas such as local government financing vehicles," which are key lending entities on behalf of local governments, Pang said. "Risks for property loans alone are manageable, but regulators may need to do more to rein in contagion risks."

The regulators are also likely to work with creditor banks to the potential restructuring of developers, Pang said, which would affect banks' decision to refinance, downgrade or make provisions against property exposure. As a result, any material bad loans recognition, if any, is more likely to be in the fourth quarter of 2021 or thereafter.

Meanwhile, China's major banks are sufficiently capitalized and appear prepared for unexpected shock, according to the earnings results. Except Bank of China, five other large state-backed banks reported an average capital adequacy ratio of 16.53% as of Sept. 30, up from 15.93% as of Dec. 31, 2020. Bank of China's capital adequacy ratio fell to 16.00% from 16.22% during the same period.

As banks recognize bad loans and write them off, capital adequacy ratio is vital for the long-term health of the banking industry, said Iris Pang, chief economist, greater China at ING, a Dutch bank.