China May Loosen Bad-Loan Provision Rules, Bank Chairman Says

  • Coverage ratio could drop to 120-130 percent: CCB chairman
  • Banks losing ability to smooth out profits as bad loans rise

A Chinese bank head signaled confidence that the government will loosen requirements for lenders’ bad-debt provisions, a move that could help them to report larger profits.

A reduction in the coverage ratio to about 120 percent to 130 percent of existing nonperforming debt would be “reasonable” and “possible,” Wang Hongzhang, the chairman of China Construction Bank Corp., told Bloomberg News on the sidelines of an event in Singapore on Monday. The regulator “may differentiate among different banks on ratios,” he said.

Some of China’s largest banks, which are due to report first-quarter results this week, have lost room to smooth out their earnings after letting their coverage ratios -- a key swing factor in earnings reports -- fall close to the minimum of 150 percent. In the case of Construction Bank, the level fell to 151 percent at the end of 2015 from 222 percent a year earlier.

Construction Bank reported a 0.1 percent increase in net income for 2015 after a 47 percent jump in nonperforming loans.

Wang said any reduction in the coverage ratio wouldn’t have a big impact on CCB’s earnings.

China’s cabinet has discussed lowering the coverage ratio and the China Banking Regulatory Commission would decide the timing and magnitude of any reduction, people familiar with the matter said in February. Some big banks have used a ratio of about 120 percent for their 2016 budgeting, according to the people.

Tough Choices

“Some big banks are probably torn between whether to breach the 150 percent threshold or report a profit decline,” Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co., said last week. “For the first quarter, they can still maneuver a bit by cutting costs here and there, and end up with zero profit growth and still maintain the minimum NPL coverage ratio -- but for the full year nobody can achieve both.”

Against the backdrop of a slowing economy, turmoil in the stock market and government measures to curb overcapacity in manufacturing, bad debt in China’s banking industry jumped 51 percent last year to 1.27 trillion yuan ($195 billion), data from the bank regulator show.

Bank of China Ltd. will disclose first-quarter earnings on Tuesday, the first of the big four banks to report.

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