January 27, 2014 / 11:56 AM / 4 years ago

CITIC's $860 mln writeoff signals cost of slowdown to China's banks

* Shareholders back 5.2 bln yuan bad loan provision for 2013

* Bad-loan write-off more than double original estimate

* Mid-sized banks share strain of slower economic growth

SHANGHAI, Jan 27 (Reuters) - China CITIC Bank’s shareholders have agreed for the bank to more than double bad-loan writeoffs for 2013, the latest sign of how much China’s economic slowdown is costing the country’s mid-sized banks.

At a meeting in Beijing on Monday, shareholders signed off as expected on management’s plan to write off 5.2 billion yuan ($860 million) in non-performing assets, CITIC said in a Hong Kong stock exchange filing. The bank originally budgeted for 2 billion yuan in writeoffs.

Exposed in particular to a buckling in the country’s steel industry as China’s slowing growth depresses demand, the bank’s move offers a rare public glimpse of loan-loss management by mid-sized lenders under pressure to strengthen their balance sheets amid tighter global rules on capital.

CITIC said its net profit for 2013 would not be affected by the steeper writeoffs as they will also cut its tax liability.

Yet the move highlights the bank’s above-average non-performing loan ratio, which stood at 0.90 percent at the end of September 2013, the last period for which data is available, compared with 0.83 percent for other mid-sized lenders.

The bank’s request for shareholder approval was a formality because of the government’s majority stake in the bank. But it was also an unusual step, as a company’s directors have the authority to write off bad debts occurring in the normal course of business, without public disclosure.

“Normally speaking, you’re not required to do this on a regular basis,” said Grace Wu, a China banks analyst at Daiwa Capital Markets. “It’s because the amount of disposal for Citic Bank is higher than what they were originally planning for.”


Yet the writeoffs for 2013 may not be the end of CITIC’s bad loan headaches. Its loan-loss coverage ratio - defined as the ratio of loan-loss reserves to total loans - stood at only 2.09 percent at end-September, well below the system-wide average of 2.78 percent, according to Reuters calculations based on official figures.

Mid-sized banks are generally faring better than their larger counterparts. The country’s big banks had an average non-performing loan ratio of 0.98 percent at end-September 2013, according to official figures.

This is in part due to the big banks’ higher exposure to politically directed lending, which may be subject to less rigorous risk management, said Wu.

Official data shows China’s system-wide non-performing loan ratio stood at 0.97 percent at end-September 2013, barely above the 0.95 percent ratio at end-2012. Most analysts, however, believe the true ratio is higher.

Banks can disguise bad loans by extending maturities or offering new loans to roll over old ones. Another potential source of undisclosed bad debt is off-balance sheet lending, which has recently come under increased regulator scrutiny.

Small and medium-sized lenders have been among the most active in raising off-balance sheet funds through the sale of so-called wealth management products. Banks market these as a high-yielding alternative to traditional bank deposits.

But like their international counterparts, Chinese banks are under pressure to raise capital to meet tough new capital adequacy standards. The country’s banking regulator began phasing in new capital norms last year in line with global rules known as Basel III, introduced in the wake of the 2008 financial crisis to strengthen banks’ ability to absorb losses.

CITIC said in August it would issue as much as 37 billion yuan in subordinate debt, which counts as Tier II capital under China’s Basel III rules. Tier I indicators are the most reliable measures of a bank’s reserves, while Tier II figures are considered less so. The bank said the issuance will occur before the end of 2015.

CITIC’s Tier I capital ratio stood at 9.24 percent at end-September, slightly below the system-wide average of 9.87 percent. China requires its banks to have a minimum Tier I capital ratio of 6 percent.

The Ministry of Finance issued revised rules on Jan. 22 to make it easier for banks to write off small loans. ($1 = 6.0488 Chinese yuan) (Reporting by Shanghai and Bangalore newsrooms; Additonal reporting by Gabriel Wildau; Editing by Kenneth Maxwell and David Holmes)

Our Standards:The Thomson Reuters Trust Principles.
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