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China's big five banks are losing money from writing off bad debt at a rate faster than they have been able to earn profits or raise capital this year, diminishing hopes that the industry could start to put the worst of China debt problem behind it next year while the non-performing loan (NPL) ratio is still climbing.
Led by the Agricultural Bank of China, which set the industry record for worst NPL ratio of 2.39 per cent, the average NPL ratio at the national "big five" has climbed back to 1.72 per cent, up from 1.69 per cent recorded by the China Banking Regulatory Commission at the end of June. The increase follows a brief hiatus from what seemed to be an improvement from earlier figures.
Total losses from bad assets at the big five amounted to 273.7 billion yuan ($40 billion) in the nine months ended September, versus the 776.9 billion in net profits and 1.8 trillion yuan in new capital they raised mostly through bond and rights issues so far in 2016.
Partly because of central government pressure to fix the bad debt issue, banks are reporting a 54.6 per cent higher bad loan loss figure compared to a year ago. At the same time, net profits came in flat, reaching an average of just 0.89 per cent when excluding a one-off 9.9 per cent gain by Bank of China from a series of internal asset transfers within its Hong Kong business.
"If ICBC could begin to show it is stabilizing on its level of non-performing loans formation, we could start to confirm the thesis that we are to see a peak on the non-performing loans issue in the banking industry next year," said Shujin Chen, research director at DBS Vickers.
The bank, by far the nation's biggest by assets, reported a jump in its NPL ratio to 1.62 per cent at the end of the third quarter, up from 1.55 per cent in June.
ICBC also took the lead in testing the government's regulatory line by lowering its bad debt provision level to 136 per cent, down from the previous 143 per cent. China's banks are expected to hold a minimum of 150 per cent more capital against their balance of bad debt.
China Construction Bank, the nation's next bigger player, said it also lowered its provision below the requirement, although only to 148.8 per cent, while Bank of Communications' provision level stood at 150.3 per cent.
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In comparison, banks with higher NPL ratios kept well above the line. Agricultural Bank of China said its provision was at 172.7 per cent, while Bank of China, the bank that led the biggest debt write-offs at 64 billion yuan this year, was at 155.8 per cent.
"The provisions go down when the balance of the banks' non-performing loans increase or if they write off more assets, which would wear off the reserves," said Chen. "[The People's Bank of China] has been using price measures to change banks' behaviour. But the price impact has not been especially strong.
"Compared to the central bank, the China Banking Regulatory Commission could be more concerned about the provisions level. It does not have a very clear guidance on the matter [when banks drop below the required ratio]," Chen said.
With ICBC's lead, the end result was thinner average cash buffers across all banks, which on average saw a full 11 percentage points drop in the reserves they hold against the bad loans, to an average of 152.8 per cent, from the 163.9 per cent level in the prior quarter.
Some analysts believe the banks could get away with a temporary dip in their reserves as it came about after the government urged lenders to speed up resolution of the NPL issue.
However, Chen said she expect there could be informal discipline measures, such as having ICBC's product launches blocked.
The International Monetary Fund recently said mainland banks' cash reserves may well cover their "expected" loan losses, but they were still short when potential further losses from "at risk" corporate loans were considered.
Regulators in other parts of the world have been relaxing similar requirements for capital. BNP Paribas was one such beneficiary under a recent relaxation in buffer calculation requirements under the European Central Bank.
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