UPDATE 2-Bank of China sees rising bad loans as profit growth slows

Tue Aug 19, 2014 9:08am EDT

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By Lawrence White and Engen Tham

HONG KONG/SHANGHAI, Aug 19 (Reuters) - Bank of China Ltd (BoC) reported slowing profit growth and said it could see more loans go bad in the second half of the year as export-focused regions suffer.

BoC on Tuesday posted an 8.3 percent rise in its second-quarter net profit compared with the same period last year, to 44.3 billion yuan ($7.21 billion), according to a Reuters calculation from company figures.

That was in line with analysts' expectations, but continued the trend of slowing profit growth for Chinese lenders as the costs of dealing with worsening asset quality increase.

BoC, the country's fourth-largest lender by market value, had posted growth of 17 percent in the second quarter of 2013.

The bank's non-performing loan ratio increased slightly to 1.02 percent at end-June compared with 0.98 percent at end-March, pushing it above the 1 percent maximum level that the Chinese banking regulator has said is healthy.

A slowing economy has raised investor concerns about bad loans in the banking sector.

"Credit assets will face great pressure in the second half of the year," said Zhang Jinliang, vice president of BoC, at a media conference in Beijing on Tuesday.

In the first half of the year, 27 billion yuan was spent on dealing with non performing assets, Zhang said.

The bank's new bad loans are concentrated in manufacturing, wholesale businesses, and the steel industry, Zhang said, and are largely in export-orientated areas, such as Zhejiang, Shandong, and Guangdong provinces.

SOURED LOANS

In response to rising bad loans, banks have cut off lending to riskier borrowers, tightened lending terms and, in one case, deployed teams of investigators to assess the risk of loan defaults.

Chinese lenders have also accelerated writing off bad assets, clearing away soured loans that had in the past lingered on their books.

BoC disposed of 7 billion yuan of bad assets in the first half of the year, Zhang said, without elaborating on the disposals.

"In the second half, the bank will continue to seek market-orientated ways to dispose of bad assets and increase its recovery rate," he said.

Bank of China is testing new rules for calculating its capital adequacy, under which its ratio dipped slightly from 12.46 percent at end-December to 12.41 percent at end-June. Under the old method, however, BoC said its capital level would have fallen to 11.78 percent.

Regulators' tough implementation of the new Basel global capital rules is pushing Chinese banks to raise record levels of funding to bolster their capital levels.

Lenders in the country are poised to raise a record $120 billion in the next two years to shore up their balance sheets in the face of slowing growth and rising bad debts.

Bank of China earlier this month said it had won regulatory approval to issue preferred shares of up to 60 billion yuan ($9.75 billion) in the domestic market and up to $6.5 billion overseas, part of a broader plan by China's top lenders to meet Basel requirements.

Net interest margins were 2.27 percent at the end of the second quarter, hardly changed from the 2.29 percent at the end of the first quarter.

($1 = 6.1408 Chinese yuan) (Additional reporting by Xie Heng in BEIJING; Editing by Miral Fahmy, Matt Driskill and Pravin Char)

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