China’s bad-loan ratio rose “significantly” in the first quarter, increasing risks for the nation’s banking industry, according to the nation’s largest manager of soured debt.
The business environment this year has been “grim and complicated” as lenders face pressures on asset quality, liquidity and lending margins, China Huarong Asset Management Co. Chairman Lai Xiaomin said during an internal meeting on April 15, according to a statement today on the website of the Beijing-based company.
China’s slowing economy has made it tougher for borrowers to repay debt, driving up banks’ sour loans for a ninth straight quarter as of December to the highest level since 2008, data from the banking regulator show. New nonperforming loans amounted to more than 60 billion yuan ($9.6 billion) in the first two months of this year, compared with 100 billion yuan for all of 2013, China Business News reported on April 9, citing people it didn’t identify.
“The economic indicators we’ve seen so far are quite disappointing and repayment risks are rising across sectors from property to small businesses due to weak demand,” Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp., said by phone. “Banks will be hit in such an operating environment but managers of bad assets like Huarong and China Cinda Asset Management Co. stand to benefit” because they can accumulate more sour loans, she said.
Huarong’s profit in the three months to March climbed 75 percent to 5.1 billion yuan from a year earlier, surpassing its target, Lai said.
China’s four largest lenders are due to report first-quarter earnings starting April 24. Shares of Industrial & Commercial Bank of China Ltd. and its three closest rivals are trading near record-low valuations in Hong Kong and Shanghai as slower economic growth and rising bad debts squeeze profitability.
ICBC shares in Hong Kong lost 0.2 percent to HK$4.80 as of 2:40 p.m. local time, while China Construction Bank Corp., Bank of China Ltd. and Agricultural Bank of China Ltd. lost at least 0.9 percent. ICBC, CCB and Agricultural Bank slumped more than 7 percent this year, compared with the benchmark Hang Seng Index’s 2.5 percent drop.
The ratio of sour loans to total lending at the 10 largest publicly traded banks in China rose 6 basis points, or 0.06 percentage points, last year to 0.99 percent, according to a statement from PricewaterhouseCoopers LLP today.
The bad-debt data pointed to a “clear downward trend” in banks’ asset quality, Raymong Yung, PwC’s China financial services leader, told reporters in Shanghai today. Lenders’ nonperforming loans will rise further, he said.
Shares of Cinda Asset, the first of the nation’s four state-owned bad-loan managers to go public, rose 0.7 percent to HK$4.26. The stock jumped 19 percent since it first started trading in Hong Kong in December.
Huarong, which was restructured into a commercial company in October 2012, is planning to sell shares to strategic investors by June before it begins preparing later this year for an initial public offering, said Lai, a former spokesman at the China Banking Regulatory Commission.
Huarong is seeking to sell as much as 20 percent of its shares to investors as it aims for a Hong Kong IPO in the first half of 2015, Lai said on March 5. KKR & Co. and BlackRock Inc. are among investors in talks to buy a stake in Huarong, Reuters reported in January.
China set up Huarong, Cinda (1359) and two other national asset management companies in 1999 to clean up a financial system on the brink of bankruptcy after decades of government-directed lending to unprofitable enterprises.
To contact the editors responsible for this story: Chitra Somayaji at email@example.com Darren Boey, Russell Ward