Mainland lenders could be coughing a bit but are far from sick, according to Jiang Jianqing, chairman of Industrial and Commercial Bank of China (ICBC), speaking yesterday at the bank's results briefing.
Net profits at the bank, the largest lender on the mainland, rose 26 per cent to 208.4 billion yuan last year, beating analysts' estimates.
Last year's final quarter saw four out of the five largest mainland banks posting rises in both non-performing loan ratios and outstanding bad debt. Analysts say this signals a possible end to a cycle of credit improvement.
Jiang, however, said the banks could only be diagnosed sick after non-performing loan (NPL) ratios rose in several consecutive quarters, which would be definite proof of deteriorating asset quality.
ICBC's president, Yang Kaisheng, said the bank would control the size of its loans to local government financing vehicles, or LGFVs, companies set up to borrow on behalf of local governments, which were often barred from borrowing themselves. Excessive lending to LGFVs has led to concerns over systemic risks in the mainland's banking sector.
After an adjustment in calculations, ICBC's outstanding LGFV loans dropped 240 billion yuan to 680 billion yuan. The LGFV non-performing loan ratio stood at 0.73 per cent, lower than the bank's overall NPL ratio of 0.94 per cent, but up 3 basis points from the third quarter of last year.
About 90 per cent of local government loans were fully backed by cash flow, indicating the projects were generating enough profits to service the loans. Another 6.6 per cent were 80 per cent covered by cash flow.
A chunk of LGFV loans will mature in the near future, but mainland media reports have suggested that many of the loans would need to be rolled over. 'That's not the situation with ICBC,' Yang said.
The bank's provision - money set aside for possible bad loans - rose 16.6 per cent to 194.9 billion yuan as it increased its efforts to meet regulatory requirements by having a loan loss reserve ratio of 2.5 per cent, a yardstick to measure bad loan reserves set aside against total loans.
Following many other mainland lenders, the bank cut its dividend payout by around 4 percentage points to 34 per cent, to boost its capital adequacy levels.
The bank's capital adequacy ratio, which measures capital against risk-weighted assets, rose 90 basis points to 13.17 per cent. Core capital, which mostly consists of equity, rose 10 basis points to 10.07 per cent. Looking ahead, ICBC plans to provide more loan support to state manufacturing, culture, trade financing and technology innovative sectors. The bank also wants to allow faster loan growth for smaller firms.
Loans to small and medium-sized enterprises made up 60 per cent of the bank's loan book at the end of last year.
ICBC's net interest margin, a measure of lending profitability, rose 17 basis points to 2.61 per cent year on year.