China Construction Bank’s Bad-Loan Buffer Slips Below Minimum

  • Lender grinds out profit gain by cutting bad-loan provisions
  • Profit increased 1.3 percent in quarter from a year earlier

China Construction Bank Corp. ground out a 1.3 percent gain in quarterly profit -- by letting its bad-loan buffer fall below a regulatory minimum.

The lender’s loan-loss coverage ratio was 148.8 percent, less than the required 150 percent, according to its filing to Hong Kong’s stock exchange on Thursday.

Construction Bank is the third of the four big state banks to prop up profit by letting the provision ratio fall below the minimum. Bank of China Ltd.’s breach was temporary, while Industrial & Commercial Bank of China Ltd. has been a more persistent offender.

For a big state bank, reporting a profit decline would be “sending a bad signal to the market about the status of the Chinese economy -- that’s not politically correct,” Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co., said ahead of the earnings season.

China’s banking regulator has resisted lobbying by the big lenders to lower the minimum ratio, people with knowledge of the matter said in July. The China Banking Regulatory Commission instead urged banks to take steps to restore their buffers, said the people, who asked not to be named discussing private information.

Keeping Score

ICBC’s breaches this year prompted the central bank to deduct points from its metrics under the so-called Macro Prudential Assessment framework, a measure of the health of Chinese banks, Caixin reported this month.

While China’s biggest state lenders have managed to keep profits increasing every year since 2004, rising bad loans and pressure on lending margins are making the task harder. For the full year, the country’s five largest lenders are projected to post a 2 percent decline in their combined net income, according to analysts surveyed by Bloomberg.

The loan-loss provisions are a key swing factor for earnings. Construction Bank’s net income for the three months through Sept. 30 was 60.4 billion yuan ($8.9 billion), the company said. The lender’s bad-loan ratio was 1.56 percent.

Construction Bank set aside 17.1 billion yuan of provisions for bad loans, down from 22.9 billion yuan a year earlier.

China’s surge in corporate debt since the global financial crisis is posing risks to the economy, with a Bank for International Settlements warning indicator for potential banking stress rising to a record this year. A fledgling program of debt-for-equity swaps and a ministry-level committee to rein in leverage are among government responses.

Corporate debt is growing faster than in Japan during that nation’s bubble period, Goldman Sachs Group Inc. analysts said this month, urging China to be “more proactive” in recognizing and disposing of bad loans.

Other key numbers in Construction Bank’s report included:

  • The bank extended 1 trillion yuan of new loans in the first nine months of the year
  • Bad loans were 179.7 billion yuan at the end of September
  • Net interest margin: 2.26 percent
  • Capital adequacy ratio: 15.36 percent

Construction Bank’s role in China’s efforts to pare back leverage have included scoping out dozens of potential debt-for-equity deals and taking part in debt-relief packages for Wuhan Iron & Steel Group and Yunnan Tin Group.

The bank also sold securities backed by nonperforming credit as part of a trial program to help lenders limit their build-ups of bad debt.

In a positive sign, the first big Chinese bank to report third-quarter earnings, Bank of China, had a “sharp” slowdown in the formation of nonperforming credit, according to estimates from analysts at China International Capital Corp. Bank of China posted a 2.4 percent gain in profit from a year earlier.

— With assistance by Jun Luo, and Alfred Liu

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