China Economy

Bad loans to grow as disposal becomes harder, says chairman of China’s biggest ‘bad bank’

China Huarong in talks to acquire a US insurer as it seeks new growth engine

PUBLISHED : Wednesday, 31 August, 2016, 7:46pm
UPDATED : Wednesday, 31 August, 2016, 10:59pm

China’s non-performing loans are set to grow in the next three years as more companies see their earnings decline and some default in paying back debts as the macro economy continues to find a bottom, Lai Xiaomin, chairman of China’s biggest bad bank China Huarong Asset Management said, in Hong Kong on Wednesday.

The bad loan market is expanding but Lai noted that the quality of non-performing loans (NPLs) is deteriorating, making it harder to earn a profit by disposing of them. As a result, his company is actively developing other financial services like securities and futures, financial leasing and the trust business.

China Huarong is also in talks to buy an overseas US dollar denominated insurer. An ideal target would have 100 billion yuan (HK$116 billion) to 200 billion yuan worth of premiums under management, Lai said.

“The downward pressure of the macro economy is increasing for the second half of the year and non-performing loans continue to grow bigger. I do not think the momentum will reverse in the short term,” he said.

“Although the market for bad assets is growing, some of the assets would not reach my standard for selection,” Lai said, adding that the average time to dispose of a bad asset package is now from one to three years, more than half a year longer than in 2005.

Official numbers show the NPL ratio among China’s commercial banks has been on the rise for 19 consecutive quarters up to June. On Monday the official Securities Journal reported a new debt-to-swap programme, where debt that banks hold in underperforming companies would be traded for stock holdings, would be introduced as early as this month.

The new programme would be market-oriented, law-based, and the central government would not give us mandatory assignments
Lai Xiaoming, China Huarong

China’s big four bad banks, including Huarong, were set up in 1999 to carry out a similar mission. From 1999 to 2005 the four companies soaked up non-performing loans worth 1.4 trillion yuan from state-owned banks.

However, Lai said the new swap programme would be very different.

“The new programme would be market-oriented, law-based, and the central government would not give us mandatory assignments,” he said, adding that Huarong would not accept bad assets from a company on the edge of bankruptcy or without proper pledges. Huarong is “completely market oriented now”, he said.

Shujin Chen, research director at DBS Vickers, said; “Last time the swap plan was mainly covered by a government fund while this time, based on the official statements so far, the big four bad banks are unlikely to be assigned heavy missions, although political assignments can hardly be avoided for state-backed financial institutions.”

Bad asset management disposal remains the core business for China Huarong. The company absorbed 55.02 per cent of the 264.6 billion yuan worth of bad asset packages released by banks during the first half of 2016, Lai said. He expects the second half of the year to see a similar amount of bad assets.

China Huarong reported on Tuesday that its net profit increased 32.8 per cent to 11.12 billion yuan in the first six months. Lai said he couldn’t guarantee profitability will stay the same for the second half given the downward pressure of the economy and as uncertainties piled up.

Distressed asset management contributed 57.2 per cent to the total pre-tax profit, up from 51.6 per cent in the same period last year.

The Ministry of Finance owns more than 36 per cent of Huarong’s H shares, and 31.68 per cent of its domestic shares. US based Warburg Pincus & Co is Huarong’s third largest shareholder, followed by China Life.

Lai said he sees more positive than negative signals in terms of economic growth as the central government was pushing for restructuring and the economy is big enough to offset the headwinds.

“The biggest challenge is to prevent risks generated during the process when the economy finds a new engine to replace the old one,” he said.