Lender's write-offs to clear legacy bad loans

PUBLISHED : Wednesday, 14 January, 2009, 12:00am
UPDATED : Wednesday, 14 January, 2009, 12:00am

Shenzhen Development Bank, the first mainland lender to issue a profit warning for last year, said tighter regulatory requirements prompted it to clean up its heavy problem loans.

The lender, controlled by private equity firm Newbridge Capital of the United States, said on Monday its earnings for last year would plunge 77 per cent as it set aside 5.6 billion yuan (HK$6.36 billion) as bad-debt provisions and wrote off 9.4 billion yuan of non-performing loans.

Chairman Frank Newman said the loan provisions and write-offs provided the bank an opportunity to 'clear house' before the start of another year. 'We started out with a history of non-performing loans left over from 2004 while other banks, particularly the Big Four banks, had already cleared them out much earlier,' he said.

'So it is prudent for us to use existing strength to bolster the balance sheet and prepare for business in 2009.'

The China Banking Regulatory Commission tightened the guidance on loan provision and coverage for mid-sized banks in December last year as the global financial crisis deepened.

After the write-offs, Development Bank's bad-loan ratio would drop to 0.7 per cent from 4.3 per cent at the end of September last year, it said.

Provision coverage will exceed 100 per cent, broadly in line with other publicly traded mid-sized mainland banks.

'The bulk of the bank's write-down is to clean up its legacy bad loans, which were already taken out at the larger state lenders,' said Warren Blight, an analyst with Fox-Pitt Kelton. 'This will allow it to fare better in a year when the bad-loan ratio is expected to see some uplifts from rapid deterioration of the world economy.'

While the lender's profit warning heightened concerns of deteriorating loan quality at other mainland banks, analysts said the bank's loan loss was not indicative of a wider industry problem.

Ivan Li Sing-yeung, an analyst at Kim Eng Securities, said bad-loan ratios at mainland banks had already shown signs of picking up in the fourth quarter. However, most banks would report profit growth for last year.

'Most of them have provision coverage of at least 120 per cent, which is sufficient to prevent a huge rebound in bad loans.'

However, Mr Newman said his bank's write-offs were not related to new loans to small enterprises.

Lending to small firms, which was encouraged by the government, would drive up bad loans this year because of rising defaults from slowing export growth, analysts said.

Goldman Sachs said the Shenzhen-based bank's relatively high exposure to mid-sized manufacturers would add pressure on interest margins and other cyclical risks. About 25.3 per cent of the bank's loan portfolio was related to manufacturers, compared with a sector average of 23.5 per cent, it estimated.

Shares in the bank fell 3.96 per cent to close at 9.47 yuan. They fell as much as 11 per cent earlier in the day.