* NPLs rose partly on tighter loan classification - chmn
* Has about 430 bln yuan worth of loans to local govts
* NPL ratio on local govt loans slightly higher
* Non-performing loans rose nearly 10 pct in Q4
* Pace of loan growth expected to quicken this year
By Kelvin Soh
HONG KONG, March 26 (Reuters) - China Construction Bank , the world’s second-largest lender by market value, said an increase of about a tenth in its non-performing loans in the last quarter was due in part to it tightening its loan standards, prompting it to set aside more money for bad debt.
Rising bad loan costs among Chinese banks highlight growing concern that non-performing loans (NPLs) are likely to increase as growth in the economy slows. Premier Wen Jiabao this month forecast sub-8 percent GDP growth for the first time in eight years.
“We’ve been very diligent about how we classify our loans, maybe even more so than the regulators and other banks,” CCB Chairman Wang Hongzhang told reporters on Tuesday. “Our NPL numbers may look higher than some competitors, but our credit quality is definitely as good or even better than everybody else.”
CCB’s total non-performing loans rose almost 10 percent in October-December, a reflection, too, of a deterioration in the manufacturing, real estate and retail sectors, the bank said.
“The price-to-book ratio of many Chinese banks implies that NPLs should be higher than reported,” said Khiem Do, a fund manager at Barings Asset Management, which has almost $48 billion in assets under management globally. “The poor share performance has reflected concern over NPLs in the Chinese banking sector.”
Shares in the country’s so-called “big four” state-owned banks, collectively worth some $700 billion, have fallen 9-14 percent this month, underperforming the broader Hang Seng benchmark’s 4.7 percent decline.
The big-four - Industrial and Commercial Bank of China , CCB, Agricultural Bank of China and Bank of China - account for about 40 percent of total loans in China.
CCB extended about 150 billion yuan ($23.8 billion) worth of loans in January-February, with lending growth expected to rise more quickly this year than last year’s 14.5 percent growth, it said.
It still has some 430 billion yuan worth of local government debt on its books, which had an NPL ratio slightly above its overall loan portfolio, said Wang.
China’s banking regulator has told lenders they incorrectly classified about 20 percent of their outstanding local government loans into the safest category of lending, Bloomberg reported on Saturday, citing an unnamed person with knowledge of the matter.
The banks underestimated the risks on about 1.8 trillion yuan ($286 billion) worth of local government lending when they decided the loans were fully covered by cash flow, the report said, adding that reclassifying the loans would require more money to be set aside, and this could eat into earnings.
“We have been cutting back on our exposure to local governments, and although the NPL ratio is slightly higher, the risks are under control,” Wang said on Monday.
To build infrastructure across China and stimulate economic growth, local governments borrowed heavily from banks in 2009-10 and are now seen as a major threat to the economy as many cannot repay their debts.
The government said last year that local governments had borrowed an estimated 10.7 trillion yuan, and analysts estimate at least a fifth of the loans may be delinquent.
“They are trying to manage the quality of their loans very tightly, but NPLs is an issue the market is very concerned about and any tick upwards will not be good,” said Patrick Pong, an analyst at Mirae Asset Management in Hong Kong. “If the economy slows, credit quality will naturally worsen.”
CCB, which counts Singapore state investor Temasek as a stakeholder, posted a 23 percent rise in October-December net profit to 30.25 billion yuan ($4.8 billion), according to Reuters calculations from full-year numbers. Full-year profit rose 25 percent to 169.3 billion yuan, just shy of a mean estimate from 25 analysts surveyed by Thomson Reuters I/B/E/S.
CCB said loans marked as “sub-standard” spiked 27 percent in the second half of last year. The bank increased its loan-loss provisions by 20 percent.
Fee income, which has driven the bank’s profit growth in recent years, slipped 14 percent in the fourth quarter to 18.2 billion yuan, hit by regulators tightening controls on certain charges, and a cut in guarantees required for loans by small- and medium-enterprises, bank executives said.
“As loan pricing weakens and regulators target off-balance sheet activities and control fee income, momentum in fee income may slow further,” said May Yan, an analyst at Barclays Capital in Hong Kong.
Third-ranked AgBank last week reported a drop in fourth-quarter net profit on rising bad loan costs and slowing credit growth.
CCB is also paying out less of its profit in dividends.
China’s Central Huijin Investment, state parent of the country’s top four lenders, cut the dividend payout ratio last month for CCB, ICBC and Bank of China.
Mirae Asset Management estimates CCB’s 2011 dividend payout ratio at about 34 percent, down from 39 percent in 2010.
CCB shares fell 1.2 percent to a 10-week low in Hong Kong on Monday.