China Bank Regulator Said to Resist Push to Cut Loan Buffers

  • Two large banks breached threshold in first-quarter results
  • China regulator said to urge banks to restore coverage ratio

China’s banking regulator is resisting lobbying by the nation’s biggest lenders to lower a minimum threshold for bad-loan buffers which some of them breached earlier this year, people with knowledge of the matter said.

The China Banking Regulatory Commission is instead urging banks whose provisions for covering nonperforming loans are below the 150 percent minimum ratio to take steps to restore their buffers, said the people, who asked not to be named discussing private information.

The CBRC’s move is another signal that China’s regulators are toughening their stance on curbing risks in the country’s highly-leveraged financial system. Credit has roughly doubled as a proportion of gross domestic product over the past eight years to stand at 243 percent by the end of 2015, according to Fitch Ratings.

In a separate bid to clamp down on risks in China’s shadow banking sector, the CBRC has proposed tougher rules for the nation’s $3.5 trillion market for wealth-management products, a person with knowledge of the matter said on Wednesday.

The regulator’s stance means banks may need to sacrifice profitability to restore buffers that Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. breached in the first quarter. Some of the biggest lenders, which are due to report earnings next month, had been publicly arguing that the 150 percent ratio should be lowered.

"Higher provision means lower profit, and lower profit means even lower valuation -- and that’s bad news to equity investors," said He Xuanlai, a Singapore-based analyst at Commerzbank AG. "But apparently CBRC believes the stability of the financial system matters most."

Profits Threatened

Banks which fail to meet the required ratio won’t be immediately penalized by the CBRC, the people said. Even so, the regulator is pushing them to accelerate bad-loan writeoffs, the people said -- a move that would boost the coverage ratio while hitting profits.

More than a decade of profit growth at Chinese banks is threatened by slowing growth and an accompanying rise in nonperforming loans, hurting their ability to return money to shareholders. That prompted the nation’s largest lenders to urge the regulator to cut provisioning requirements earlier this year. A bad-loan coverage ratio of about 120 percent to 130 percent would be "reasonable" and "possible," the chairman of China Construction Bank Corp. Wang Hongzhang said in April.

Despite boosting provisions in the first quarter, ICBC and Bank of China allowed bad-loan coverage ratios to slip below the regulatory minimum of 150 percent, while Construction Bank and Bank of Communications Co. came close to the minimum.

Ratios Slip

Some lenders whose bad-debt coverage ratios slipped below the regulatory minimum in the first quarter have since lifted the buffers back above the threshold, one of the people said, without naming the banks.

The CBRC hasn’t made a final decision about whether to keep the ratio unchanged and could lower it in the future, the people said. The regulator didn’t immediately reply to a fax seeking comments.

Combined profits at the top five banks may drop 3.4 percent in 2016, the first decline since 2004, according to analysts surveyed by Bloomberg. ICBC shares were down 1.4 percent as of midday in Hong Kong. Bank of China fell 0.9 percent.

— With assistance by Heng Xie, Jun Luo, Dingmin Zhang, and Steven Yang

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