Chinese banks in stand-off with regulators on loan default provisions
China’s banks are in a deepening standoff with regulators over the level of provisions they must make to protect against loan defaults as bad debts continue to climb.
While institutions are required to maintain provisions of at least 150% of nonperforming loans, the largest banks are pressing for looser rules through a mixture of public lobbying and private defiance.
Industrial and Commercial Bank of China — which owns about 20% of SA’s Standard Bank — has flouted the rule for three successive quarters. An executive told the Financial Times that the bank would find it difficult to come back into compliance.
"Raising loan loss provisions will affect profit growth, and [raising] profits is our biggest task right now," said the executive, who wished to remain anonymous. "The pressure of nonperforming [loans] is very great. We need the reserves we made in previous years to resolve them. Considering these two points, it is difficult to raise loan loss reserves."
Officially, 1.8% of all Chinese loans are nonperforming, although the credit rating agency Fitch puts the true figure at more than 15%. Following a huge credit boom, the outstanding amount of nonperforming loans doubled in the two years before June 2016, reaching R1.4-trillion.
In a recent macroprudential assessment by the central bank, ICBC was docked points for flouting the loan loss provision ratio target, but in the third quarter its coverage ratio fell further to 136% from 143% in the previous three months.
Bank of China, another of China’s big four state-owned lenders, fell short of the 150% standard in the first quarter.
The banks may be flouting the rules in anticipation that they will be changed. Zhou Xiaochuan, China’s central bank governor, has said that he favours a countercyclical regulatory framework, which would demand high provisions during economic booms to discourage overlending, but which would loosen standards during recessions to support the flow of credit to the economy.
Some analysts have interpreted this to mean that China’s banking regulations are about to be loosened. But while China is heading into an economic slowdown, credit growth is still booming, meaning it is not clear whether countercyclical regulation implies tightening or loosening.
"Setting standards is a tussle between the banks and the regulators," said Zhang Yingchao, banking analyst at NSBO China, an investment bank. "Who gets the upper hand depends on the state of the economy. If increasing the credit supply is necessary to meet the growth target of 6.5%-7%, then the regulators will need to relax standards."
Wang Hongzhang, chairman of China Construction Bank, another big four institution, told Bloomberg this year it would be "reasonable" and "possible" for the regulators to lower the standard to 120%-130%.
Bank of China’s research institute published a report last year recommending that the loan-loss provision ratio be lowered from 150%-100%.
Banks also argue that many other countries require loan-loss provisions of 100% or less, although some observers say there are reasons for imposing a higher number in China.
David Yin of Moody’s, the credit rating agency, said: "Chinese banks may have material amounts of problem loans that are not formally classified as non-performing, as evidenced by the rising discrepancy between banks’ overdue loan ratios and NPL ratios. The 150% coverage ratio requirement urges banks to maintain more provisions and helps mitigate the NPL classification issue."
© The Financial Times 2016