Bank of China to tighten credit risk control as bad debt reserve grows slower

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Bank of China Ltd. said it would double credit risk control in 2022 after its bad debt buffer grew at the slowest rate in at least four years.

The country’s fourth-largest bank by assets earmarked 390.54 billion yuan in loan loss provisions in 2021, up 5.9 percent from a year earlier, according to the bank’s annual results announcement. lender on March 29. The bank’s loan loss provisions, an indicator of asset quality in the near future, increased from 7.3% to 20.4% year-over-year from 2018 to 2020.

Its loan loss provision coverage ratio at the end of 2021 rose to 187% of overdue debt that is unlikely to be collected, the highest in at least five years. A higher ratio indicates a better ability to bear future losses on bad debts.

At the end of 2021, the Bank of China’s non-performing loan ratio fell to 1.33% from 1.46% a year earlier, partly due to a faster sale of bad loans. The bank’s impairment losses on assets, which include loans and other financial investments, fell 12.4 percent to 104.22 billion yuan in 2021 from a year earlier.

“We will be even more proactive in risk control in 2022,” Liu Jiandong, the bank’s chief risk officer, told a press conference after the lender reported growth of 12.3% from a year-over-year net profit for 2021.

Pressure on forecasting and monitoring credit risk comes from sectors facing liquidity issues, such as real estate and local governments, Liu said. The uncertain global economic outlook, insufficient demand and volatility in capital and commodity markets are also weighing on the repayment capacity of the manufacturing and foreign trade sectors, Liu noted.

China Merchants Bank Co. Ltd. and Industrial Bank Co. Ltd., the nation’s sixth and eighth largest lenders by assets, also reported lower non-performing loan ratios and higher coverage ratios for 2021.

Banks have an incentive to be strict on provisioning, said Michael Zeng, Hong Kong-based banking analyst at Daiwa Capital Markets. “Regulators would like to see the release of risk by making provisions while banks, even if they drag their results, would see it as a gesture of profit sharing in response to the theme of common prosperity,” Zeng said.

Economic downturn

While major Chinese banks, including Bank of China, have limited direct lending exposure to struggling property developers, the ripple effect on the wider economy has weighed on asset quality and corporate profitability. lenders. In addition to the housing market slowdown, strict border control and lockdown policies amid recurring COVID-19 outbreaks, as well as various policies aimed at tackling inequality as part of its national goal of “common prosperity”. , have raised concerns about the ability of borrowers to make repayments and overall lending. demand.

The Bank of China expects its yuan loan portfolio to grow by more than 10% in 2022, after growing 10.5% in 2021, Executive Vice President Wang Zhiheng said.

Major growth in loan demand is likely to come from sectors such as infrastructure, transportation, utilities and low-carbon industries, Wang said.

In 2021, the outstanding amount of small business loans, or so-called inclusive finance, increased by 53.2% to 881.5 billion yuan in 2021 from the previous year. Banks in China are heeding the government’s call to lend more aggressively to small businesses to help them survive the current economic downturn.

“The credit risk of these loans will likely lag behind. The NPL ratio of these loans may be slightly higher than that of regular loans, but everything is expected and manageable,” said executive vice president Wang Wei.

China’s economy could grow by 5.5%, according to the target unveiled at the ruling party’s annual policy meetings in early March. Banks, especially state-owned ones, should lend more to help the country achieve the growth target.

The People’s Bank of China is expected to support credit supply by cutting interest rates and lowering the reserve requirement ratio for banks, analysts said. The government could also roll out more measures to revive the sluggish real estate sector, which is a major component of national GDP, by easing restrictions on home purchases, among other things, analysts said.

As of March 28, US$1 was equivalent to 6.37 Chinese yuan.

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