Bank of China's Bad-Loan Buffers Weaken as Profit Declines

  • China Construction Bank flatlines with earnings unchanged
  • Banks' bad-loan buffers decline with BOC near minimum level

Bank of China Ltd.’s profit fell in the third quarter for the first time since the global financial crisis while China Construction Bank Corp. reported little-changed earnings as a slowing economy adds pressure on lenders’ balance sheets.

Bank of China’s net income slipped 1.5 percent from a year earlier to 40.8 billion yuan ($6.4 billion), the company told Hong Kong’s stock exchange on Thursday. That was less than the 42 billion yuan average of three analyst estimates compiled by Bloomberg. Construction Bank’s 59.7 billion yuan profit compared with a forecast of 60.3 billion yuan.

The results for two of China’s four biggest banks showed the mounting strain from bad loans in a cooling economy. While both set aside record extra provisions in the quarter for soured credit, their bad-loan coverage ratios fell, signaling a drag on future profits from the need to set aside additional reserves.

“Provisions are still a key tool for Chinese banks to adjust their earnings,” said Chen Shujin, an analyst at DBS Vickers Hong Kong Ltd., who forecasts zero earnings growth for the nation biggest banks in 2015. “Bank of China is under more pressure than CCB because even its pre-provision profit growth was a disappointment.”

Shares Fall

Bank of China shares slid 1.6 percent in Hong Kong as of 9:37 a.m., while China Construction Bank fell 0.9 percent. The benchmark Hang Seng Index declined 0.6 percent.

Bank of China’s 154 percent ratio of provisions to bad loans is now close to the regulatory minimum of 150 percent. Construction Bank is at 179 percent.

China stepped up monetary easing last week with its sixth interest-rate cut in a year to combat deflationary pressures and an economic slowdown. The reductions add to pressure on lenders’ net interest margins, which are already contracting. Bank of China’s net interest margin fell 0.12 percentage points from a year earlier to 2.14 percent.

The scrapping of a ceiling on deposit rates, also announced last week, highlighted government efforts to intensify competition in the banking industry and improve small companies’ access to credit.

Bank of China’s first profit decline since 2009 followed a 1.2 percent gain in the previous three months. Industrial and Commercial Bank of China Ltd., China’s biggest bank, is due to give its results on Friday. Agricultural Bank of China Ltd., the other big bank, last week posted a 1 percent profit gain in the third quarter from a year earlier.

Bank of China set aside 16.3 billion yuan of provisions for potential bad loans, an increase of 44 percent from a year earlier and the biggest amount for any quarter since it listed in 2006. The lender’s soured credit stood at 129 billion yuan at the end of September, it said.

China’s banks are getting less strict in recognizing bad loans, failing to include some debts that have been overdue for at least 90 days, Moody’s Investors Service said last month. Many analysts say that bad loan numbers are understated, with BNP Paribas SA analyst Judy Zhang estimating a level of 9 percent for Hong Kong-listed Chinese banks.

— With assistance by Alfred Liu, Jun Luo, and Aipeng Soo

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