ICBC Joins Bank of China in Breaching Bad-Loan Coverage Rule

Industrial & Commercial Bank of China Ltd., the world’s largest lender by assets, avoided posting a quarterly drop in profit after letting its buffer for covering bad loans fall below a regulatory minimum.  

The bank’s provisions for bad loans stood at 141.2 percent of existing nonperforming credit, compared with a regulatory minimum of 150 percent, the Beijing-based lender said in a statement to Hong’s Kong stock exchange on Thursday.

One of China’s biggest banks, Bank of China Ltd., this week reported that it had breached the minimum provision rule, the first lender to do so. Government officials are considering loosening the requirement, a move that would lend support to banks’ profits as the lenders digest an increased volume of bad loans.

Analysts including Sophie Jiang, of Nomura International (HK) Ltd., have said the level could be reduced to 120 percent without risk to the financial system. Prior to the global financial crisis, the ratio was at 100 percent, before being ratcheted up, reaching 150 percent in 2009.

Under Pressure

ICBC’s net income rose 0.6 percent to 74.76 billion yuan ($11.5 billion) in the three months ended March 31 as its lending margin contracted and its soured debt surged. It’s the fourth straight quarter that the lender has failed to achieve a profit gain of even 1 percent -- and the profit number would’ve been worse if it hadn’t breached the provision rule.

Bank of Communications Co., the nation’s fifth-biggest lender, posted a 0.5 percent increase in first-quarter profit on Thursday. It’s coverage ratio was at 151 percent.

Agricultural Bank of China Ltd., the third-largest, reported a 1.1 percent profit gain and a coverage ratio of 180 percent.

Slowing economic growth has helped to propel Chinese banks’ bad loans to the highest level since 2006, putting at risk more than a decade of annual profit gains for the lenders. One of the big swing factors in earnings reports is the level of provisioning for nonperforming credit.

ICBC’s nonperforming loans surged 14 percent from the beginning of the year to 204.7 billion yuan as of March 31, accounting for 1.66 percent of total lending. The bank set aside 23 billion yuan of provisions against bad loans in the quarter, 11 percent more than a year earlier.

ICBC’s net interest income fell 5.2 percent in the quarter after its net interest margin, a key measure of lending profitability, narrowed by 19 basis points.

— With assistance by Alfred Liu, and Jun Luo

Before it's here, it's on the Bloomberg Terminal.