ICBC Bad-Loan Buffer Sinks Further Below Regulatory Minimum

  • Bad-loan coverage ratio falls to 136%, earnings report shows
  • Construction Bank, too, has let its coverage ratio slip

Industrial & Commercial Bank of China Ltd., the world’s biggest lender by assets, let its bad-loan buffer sink further below a regulatory minimum to avoid reporting a bigger decline in third-quarter profit.

ICBC’s bad-loan coverage ratio slumped to 136 percent, compared with a minimum of 150 percent, the bank told Hong Kong’s stock exchange on Friday. Net income fell 0.2 percent from a year earlier to 72.58 billion yuan ($10.7 billion) for the three months ended Sept. 30.

While China’s $11 trillion economy is stable for now, some analysts predict that the hangover from a credit binge will include bank bailouts in coming years.

The nation’s biggest lenders are struggling to avoid profit declines while also dealing with a pile-up of bad debt -- and the risk that asset quality will keep getting worse. On Thursday, China Construction Bank Corp. reported that its coverage ratio had slipped below the minimum.

A contracting lending margin hurt ICBC’s net interest income, while a government push to limit costs for small businesses reduced its fee income. ICBC’s bad-loan ratio rebounded after a decline in the previous quarter.

The third-quarter profit results of China’s biggest banks also included:

  • Bank of Communications Co.: 1.4 percent gain
  • Bank of China Ltd.: 2.4 percent gain
  • Construction Bank: 1.3 percent gain

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.

Key numbers for ICBC included:

  • Bad-loan ratio: 1.62 percent from 1.55 percent in previous quarter
  • Net interest margin: 2.18 percent from 2.49 percent year earlier
  • Nonperforming loans rose to 208.9 billion yuan
  • Capital adequacy ratio: 14.18 percent 

The steady erosion of profit growth has raised questions about future dividend payouts. The top four Chinese banks cut their dividend payout ratios to 30 percent in 2015 from 33 percent in 2014.

While big lenders are grinding out meager profit growth, some of the nation’s small city commercial banks are posting significant gains. Bank of Nanjing Co. reported a 23 percent increase.

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.

— With assistance by Jun Luo

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