Bank of China Sees Bad Loans Improving as Economy Stabilizes

Bank of China Ltd., the nation’s fourth-largest lender by market value, forecasts that loan quality will improve next year as the economy stabilizes, President Li Lihui said.

While facing “some volatility,” measures of soured loans will stay in an “excellent range” at the Beijing-based lender, Li said in an interview during the 18th Chinese Communist Party Congress in the capital today, without providing figures.

Bank of China last month posted a 17 percent increase in third-quarter profit, beating analyst estimates as it broadened its lending margin and economic growth curbed defaults. Total non-performing loans at China’s four biggest banks increased 2.1 billion yuan ($337 million) in the third quarter to 295.7 billion yuan, or about 1 percent of their total advances, according to separate statements from the lenders.

The ratio for the entire industry is about 0.97 percent, Shang Fulin, chairman of the China Banking Regulatory Commission, said in Beijing today, adding that pressure is growing on risk management as the economic environment becomes more complicated. That compares with a 0.9 percent bad-loan ratio at the end of June, according to official data.

Soured Loans

Chinese commercial banks’ delinquent obligations may rise 10 percent this year and accelerate in 2013 if concern that inflation is rebounding leads authorities to tighten monetary policy, according to China Orient Asset Management Corp. The company is one of four state-owned asset managers established in 1999 to take over trillions of yuan of bad loans from the country’s largest lenders.

Shares (3988) of Bank of China fell 2.5 percent to close at HK$3.17 in Hong Kong trading today. They have gained 11 percent this year, the best performance among the nine mainland banks traded in the city. That trails a 17 percent advance in the benchmark Hang Seng Index (HSI) this year.

Bank of China won’t rule out the possibility of buying into financial institutions in the U.S. and Europe while valuations remain low, Li said, without giving details. It will continue to add branches abroad over the next few years, focusing on Asia, South America and central and eastern Europe, he said.

Overseas operations accounted for about 24 percent of Bank of China’s total assets at the end of June, the most among the country’s four largest banks. The lender is the only Chinese bank on the Financial Stability Board’s list of 28 systemically important financial institutions.

Bank of China has a “good” business structure in Europe and its London operations function “relatively smoothly,” Li said today. The Financial Times reported on Oct. 29 that China’s state-run banks are moving European business to Luxembourg from London to avoid the U.K.’s “rigorously demanding” liquidity rules.

Bank of China still has “a little” left of the 2012 lending quota assigned to it by the central bank, which should be able to meet demand from key clients, Li said.

To contact Bloomberg News staff for this story: Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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