Bank of China’s Bad-Loan Buffer Sinks Closer to Minimum Allowed

Bank of China Ltd. ground out a second straight quarter of 1 percent profit growth and its earnings statement pointed to a looming drag from the need to set aside more money for bad loans.

The lender’s bad-loan coverage ratio, a measure of provisions for nonperforming loans, declined to 157 percent as of June 30 from 188 percent at the beginning of the year, according to the company’s exchange filing on Friday. The minimum level allowed is 150 percent.

That’s the lowest among Chinese banks that have reported first-half earnings and points to the toll that a rising tide of bad loans will take on future earnings.

Bank of China is the third of the big four lenders to report this week, after Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd. posted second-quarter earnings that were almost flat from a year earlier. China Construction Bank Corp.’s earnings are due on Sunday.

At a press briefing in Beijing, Bank of China President Chen Siqing said that the Chinese economy faces downward pressure in the second half and that interest-rate liberalization and cuts to benchmark rates will put pressure on bank margins. The lender’s net interest margin was 2.18 percent as of June 30, down from 2.27 percent a year earlier.

Net income at Beijing-based Bank of China rose to 44.9 billion yuan ($7 billion) in the three months ended June 30, according to Friday’s statement. Its soured debt rose 24 percent from the beginning of the year to 125 billion yuan as of June 30.

Share Slide

Shares of Bank of China have lost 19 percent in Hong Kong this year, compared with an 8 percent decline in the benchmark Hang Seng Index.

Chinese banks’ average bad-loan coverage ratio stood at 198 percent as of June 30, according to the China Banking Regulatory Commission, which requires lenders to maintain provisions of at least 150 percent of the value of soured debt or 2.5 percent of total credit, whichever is higher.

ICBC, the world’s largest lender by assets, saw its bad-loan coverage ratio drop to 163 percent as of June 30 from 207 percent in December.

— With assistance by Jun Luo

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