Local government bad debt threat eats into mainland bank's profits

PUBLISHED : Tuesday, 29 March, 2011, 12:00am
UPDATED : Tuesday, 29 March, 2011, 12:00am

China Construction Bank's share price fell more than 2 per cent yesterday after it said it had increased the money set aside for bad debt in the fourth quarter of last year, reducing full-year earnings which failed to meet market forecasts.

'The fact that we made more [loan loss] provisions does not mean our non-performing loans are rising,' said Guo Shuqing, chairman of China Construction Bank.

'We are following regulatory requirements and taking a more prudent attitude.'

Guo told the bank's annual results briefing yesterday that net profit rose 26.39 per cent to 135.03 billion yuan (HK$160 billion) in 2010. Earnings per share rose 24.44 per cent to 56 fen.

At the end of last year, the mainland's second largest bank increased its loan loss reserve ratio to 2.52 per cent, nine basis points higher than at the end of the September quarter. The loan-loss ratio refers to reserves set aside for current and expected bad loans.

Tougher mainland financial regulations require banks to maintain loan loss reserve ratios of 2.5 per cent by 2013.

If the bank had kept its ratio at September levels, net profit would have been lifted by 3 per cent, or 4.3 billion yuan, said Mike Werner, senior banking analyst at Sanford C. Bernstein & Co.

'In the near term, this might have a negative impact on the bank, but for the mid to long term this is positive,' said Werner, who added that the fall in CCB's price presented a good buying opportunity.

CCB's share price closed down 2.32 per cent, or 17 cents, to HK$ 7.15 yesterday in Hong Kong, while the benchmark index fell 0.39 per cent.

The bank said it was taking effective measures to prevent risks from loans to local government for financing projects.

Zhu Xiaohuang, the executive vice-president of CCB, said about 65 per cent of the bank's loans to local government financing platforms had 100 per cent cash-flow coverage.

Cash-flow coverage means that the loan projects are generating sufficient cash to service the loans.

Having 100 per cent cash-flow coverage was one of the requirements for a local government finance loan to become a normal corporate loan, said Sheng Nan, an analyst at UOB Kay Hian.

In an effort to prevent these finance loans defaulting, China has been pushing banks to label the risks, based on cash-flow coverage.

Zhu said 9 per cent of the loans were 50 per cent covered. About 14 per cent were 80 per cent covered. About 12 per cent had no coverage at all.

The bank's net-interest margin, which measures lending profitability, rose 8 basis points to 2.49 per cent.

China's central bank has raised interest rates three times and bank reserve requirements six times since October last year.

Guo said he expected further increases in interest rates and reserve requirement ratios this year.