Chinese Banks Step Up Bad-Loan Writeoffs

Lenders seek to improve future profitability despite country’s economic slowdown

China Construction Bank Corp. signage sits on a wall in Hong Kong.
China Construction Bank Corp. signage sits on a wall in Hong Kong. PHOTO: BLOOMBERG NEWS

Aug. 30, 2016 8:25 a.m. ET

BEIJING—China’s largest banks are writing off huge volumes of soured lending in an effort to clean up their balance sheets, as they look to improve their future profitability despite the country’s economic slowdown.

The country’s top four banks collectively wrote off 130.3 billion yuan ($19.5 billion) of bad loans in the first half of 2016, 44% more than in the same period a year earlier.

The clear-out has helped banks in one sense: Overall, their nonperforming loans as a proportion of their lending book were unchanged at the close of the second quarter from the end of March, the first quarter since mid-2013 that the key metric hasn’t increased.

But the write-offs have come as a number of other challenges beset Chinese banks. New loans are shriveling—nearly all in July went to mortgages. A series of interest-rate cuts by the central bank since 2012 have meanwhile squeezed banks’ earnings.

The International Monetary Fund estimates China’s nonperforming-loan ratio at 15% compared with the official 1.75% reported by the government, because of differences in the way bad loans are recognized.
And a plan by Beijing to let companies allot their equity to banks in exchange for loan forgiveness is likely to saddle lenders with more dubious assets in coming months, bankers and analysts say.

On Tuesday, Industrial & Commercial Bank of China Ltd., the world’s biggest bank by assets, reported first-half results, saying its net profit edged up 0.8% from a year earlier to 150.2 billion yuan ($22.5 billion). Across the banking sector, second-quarter profit was up 3.2%, half the pace of the first quarter.

“Companies of better quality aren’t borrowing, and are mainly issuing bonds or equity-financing,” said Zhou Mubing, chairman of Agricultural Bank of China Ltd. Agricultural Bank posted the most bad loans and, alongside ICBC, the slowest profit growth in the first half among the Big Four, which also includes Bank of China Ltd. and China Construction Bank Corp.

The heavy write-offs are a step toward solving a major headache for the banks. The more bad loans have piled up in recent years, the more resources the banks have had to set aside in provisions, leaving little spare capital to invest elsewhere.

Three years ago, when signs of China’s economic slowdown were just starting to show, lenders on average had enough provisions to cover 290% of their bad loans, well above the minimum 150% level Chinese regulators require. At the urging of regulators keen to head off an anticipated wave of souring credit, the Big Four wrote off 22 billion yuan in bad loans in the first half of that year.

But the tsunami of bad debt has since grown large enough to breach regulatory buffers. In the January-June period, ICBC said its provisions covered 143% of its bad loans, up slightly from 141% at end-March. The bank and the China Banking Regulatory Commission didn’t respond to questions about the breach.

Increasing pressure on banks’ earnings, regulators have prodded lenders to get out of high-yield investments that were often recorded off their balance sheets. That has left banks more reliant on low-risk mortgages that generate relatively small profits. Six cuts to benchmark interest rates by the central bank since 2012 have triggered declines across the Big Four in net interest margin, a major source of revenue for Chinese banks.

If debt-for-equity swaps become widespread, bankers and analysts say, lenders stand to lose further. Banks are required to hold higher capital buffers for stocks sitting on their balance sheets, and equity in unlisted companies can be hard to value. In part due to the lack of relative depth in China’s financial markets, banks and insurers already own about two-thirds of the country’s corporate bonds. In one case of bond default, Dongbei Special Steel Group Co., banks and other bondholders remain in gridlock over a proposed debt-for-equity swap.

Ambiguity in China’s financial regulation means the scale of the bad-loan problem could be greater than it appears on paper. Chinese regulators allow banks to deem a loan nonperforming only if the lender thinks it might incur a loss.

At China Construction Bank, the growth of bad loans slowed in the second quarter. But the number of its so-called special-mention loans—those that the bank deems problematic but which it says are still performing—grew 12.5% in the first half, outpacing the 9.6% rise in recognized bad loans.

That and other types of overdue loans “suggest a potential rebound in nonperforming-loan formation in the coming months,” said Wei Hou of Bernstein Research.

The IMF urged Beijing recently to recognize all loans overdue by more than 90 days as nonperforming, in line with the global norm. The fund said the China Banking Regulatory Commission pushed back against that call for change. The CBRC didn’t respond to a request for comment.

—Grace Zhu contributed to this article

Write to Chuin-Wei Yap at


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