‘Bad bank’ China Huarong sees interim profit soar 32.8pc
Ability to turn bad debt into profit improves, with especially strong performance from its distressed asset management and investment businesses
Distressed asset management, its core business, saw total income decline by 2.1 per cent to 20.43 billion yuan in the first half of 2016, while profit before tax increased 46.4 per cent to 9.68 billion yuan.
The second biggest business segment, financial services including securities and futures, financial leasing, banking and consumer finance services, saw total income drop by 6.6 per cent to 11.32 billion yuan, and profit before tax decrease by 4.9 per cent to 3.9 billion yuan.
Asset management and investment, its third largest business segment which mainly includes trust business, saw income rise 74.8 per cent to 8.88 billion yuan while profit before tax up by 65.3 per cent to 2.07 billion yuan.
The company is declaring no interim dividend for 2016.
Huarong was established in 1999 to help resolve some 1.3 trillion yuan of bad debt at the country’s top four state-run banks. Known as “bad banks”, they buy soured loans at a discount from the country’s giant state lenders and then work them out, hopefully profiting along the way.
China Huarong has a growing shadow banking business, a sector which concerns analysts as the asset quality and yield are both declining
Huarong’s net profit increased 30.1 per cent to 16.95 billion yuan in 2015, after it raised US$2.5 billion in a Hong Kong initial public offering, becoming the second listed bad loan bank after China Cinda, but bigger in capitalisation. The other two are China Great Wall and China Orient.
Huarong announced in late June that it planed to raise more than US$1 billion in a public offering in Shanghai.
Some analysts said Huarong’s earnings growth was becoming volatile as impairments on distressed assets and financial assets like bonds rise sharply and returns on these assets fall.
“China Huarong has a growing shadow banking business, a sector which concerns analysts as the asset quality and yield are both declining,” said Shujin Chen, research director of DBS Vickers, ahead of the result announcement.
Jefferies analysts Baron Nie and Violet Gu wrote in a recent note: “We expect it’s A-shares listing to further improve its capital position, enabling the company to further growth in its core debt asset management business lines.
“Based on the current H-share valuation, the proposed offering size could potentially improve Huarong’s capital adequacy ratio by 4-6 percentage points, in our view,” the report said.
After its H-share floating in December 2015, Huarong’s capital adequacy ratio was recorded at 14.75 per cent, the report said. Capital adequacy ratio is a measurement of financial strength of a bank, expressed as a ratio of its capital to its assets.
