China Development Bank's Massive Payday - Wall Street Journal (blog), China’s biggest bank by assets, saw its net interest margin expand by only 0.05 percentage points.
Unlike China’s commercial banks, CDB – which is one of three policy banks, meaning it issues loans to support government development priorities – doesn’t collect retail deposits. Rather, most of its funding comes from issuing bonds, which are bought by insurance companies and other banks. The funding costs of the major banks rose significantly more than that of CDB, likely the result of increased competition between banks to attract deposits, in part due to a move by the central bank last year to liberalize deposit rates.
Moreover CDB posted a non-performing loan ratio of only 0.3%, which is low even by the standards of China’s banking system. According to data from the China Banking Regulatory Commission, the ratio of nonperforming loans (report in Chinese) across China’s commercial banks at the end of 2012 was 0.95%.
Still, CDB is exposed to some of the most distressed sectors of the economy, most notably solar . According to data from data provider ChinaScope Financial, at the end of 2011 CDB had more than 7 billion yuan worth of loans outstanding to the solar sector. The next biggest lender was Bank of China with only 4 billion yuan outstanding.
CDB is also a huge lender to local government infrastructure projects, having pioneered a funding method that allows local governments to get around rules which prevent them from borrowing directly by setting up off-balance-sheet investment companies. But local governments are increasingly struggling to balance their budgets, with many complaining that their tax revenues – which slowed significantly last year – is not enough to cover expenses. With many of the infrastructure projects they’ve built with borrowed funds not likely to generate a return for years to come – if at all – analysts say local governments may struggle to pay off their debts.
CDB says it’s alert to the risks and has taken precautions.
“The Bank made significant improvements in its credit risk monitoring function, through advanced and proactive identification of industry risks of local government financing vehicles, international business, steel, and the photovoltaic industry,” it said in its report.
During the National People’s Congress in March, Chen Yuan, then-chairman of CDB, said that the bank would step up efforts to lower risks this year, and that he expected lending to local governments to be flat this year.
Chen, who’s now retired, said he didn’t expect a sharp increase in profits in 2013, as “moderate economic growth [in China] won’t translate into big profits for banks.”
CDB was brought into being in the 1990s so that commercial banks could make commercial loans and not have to worry about lending to state-backed projects that might struggle to generate profit. With such a mandate, CDB could have readily been exploited as a government piggy bank and sunk into a morass of bad debt. Instead it’s become outrageously profitable. While that’s testament to the vision and management of Mr. Chen – who was at the helm for over a decade – it raises the question as to why such lending shouldn’t fall to China’s commercial banks.
If it’s because CDB is making considerably more risky loans that commercial banks are wary of making, then 38% profit growth might prove to be the exception rather than the rule for CDB.
– Dinny McMahon, with contributions from Lingling Wei and Grace Zhu.
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Top banks weighed down with $79b in overdue loans - China.org.cn
In some regions, the ratio reached 5 to 7 percent, he added.
Chinese banks follow the international five-category system that classifies loans as "pass", "special-mention", "substandard", "doubtful" and "loss", in line with their inherent risks. The last three groups are regarded as non-performing loans.
The overall percentage of NPLs among the top 10 banks stood at 0.82 percent by the end of 2012, up 0.01 percent from the previous year, said PwC. The overall NPL balance amounted to 376.2 billion yuan, increasing by 24.9 billion yuan from a year earlier.
"If property prices show big declines, bank lending would be in jeopardy."
Yung said the operating environment for Chinese banks continued to be difficult in 2013, and effective risk management continues to be a challenge as macroeconomic contractions continue to exert pressure on loan assets held by the banking sector.
"It's time for Chinese banks to strengthen their management of collecting repayments, and writing off more soured loans more positively."
The 10 listed banks covered by the study include the five largest State-owned lenders - the Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd, Bank of China Ltd, and Bank of Communications Co Ltd.
And the five major joint stock banks covered by the study are China Merchants Bank Co Ltd, Industrial Bank Corp Ltd, China Minsheng Banking Corp Ltd, Shanghai Pudong Development Bank Co Ltd, and China Citic Bank Corp.
Yung said although the banks were aware of the asset quality deterioration, they still had strong momentum to extend loans to riskier sectors, especially to small enterprises, for higher returns.
"The sales of wealth management products have continued to squeeze bank deposits, meaning less money available to lend out. Therefore, they have tended to seek higher returns for each sum of lending," he added.
The massive growth in sales of the products has generated considerable industry concern over China's shadow banking sector.
On Thursday, the Chinese central bank issued a report in which it said the market should "fend off any systemic risks" of wealth management products, "while allowing these products to play a positive role, by guiding banks to develop the business in a prudent and legal way".
It said returns from such products must match their risk. Banks must ensure they set aside sufficient provisions to cover their selling, while releasing regularly updated information related to the products.
Zhu Haibin, chief China economist at JPMorgan Chase & Co, said that China's shadow banking sector could now be worth as much as 36 trillion yuan, 69 percent of China's GDP and could double in two years.>