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UPDATE 1-China's AgBank fortifies bad loan provisions, sees slowest profit growth
March 25, 2014 / 11:16 AM / 4 years ago

UPDATE 1-China's AgBank fortifies bad loan provisions, sees slowest profit growth

* AgBank Q4 net profit up 12.8 pct, within expectations

* Full-year profit growth slowest on record

* Bad loans largely stable in 2014--chief risk officer

* Capital ratio dips but remains above Basel threshold (Recasts, adds details on bad loan provisions, context, details)

By Gabriel Wildau

SHANGHAI, March 25 (Reuters) - Agricultural Bank of China Ltd (AgBank) posted its slowest full-year net profit growth on record in 2013 as the country’s third largest lender bolstered provisions against an anticipated increase in bad loans.

A slowing economy and the debt overhang from the massive credit-fuelled stimulus that policymakers launched in response to the 2008 financial crisis are stoking concern about a rise in loan defaults in China.

AgBank boosted provisions against future bad loans almost 7 percent in the fourth-quarter of 2013 to 22 billion yuan ($3.55 billion) from 20.6 billion in the same year-ago period, the bank said in its earnings statement on Tuesday.

This increase raised the loan-loss coverage ratio - which measures the ratio of provisions to total loans - to a record high 4.46 percent, well above the industry average of 2.83 percent, according to official figures.

“Currently, the risk in the banking industry is increasingly high as the macro economy is in a down cycle and is in a restructuring process,” AgBank Chairman Jiang Chaoliang said in the statement.

Net profit in 2013 rose 14.6 percent, its slowest ever pace, to 166.3 billion yuan, but it was in line with analysts’ estimates. Profits for the fourth quarter alone were 28.2 billion, a year-on-year rise of 12.8 percent and lower that the 15.3 percent profit growth in the third quarter.

“Banks tend to book much larger loan provisioning in the fourth quarter, so we tend to factor in larger loan provisions,” Grace Wu, head China Banks for Daiwa Capital Markets in Hong Kong, said before the earnings were released.

SELLING OFF BAD LOANS

Investors are likely to take comfort in AgBank’s decline in non-performing loans (NPLs) and an increase in net interest margins.

The non-performing loan ratio fell slightly to 1.22 percent at end-December 2013 from 1.24 percent at end-September. So-called “special mention” loans, or those not classified as NPLs but considered at risk, also fell 19.1 billion yuan on the year.

The decline in the NPL ratio was due in part to asset disposals. AgBank sold off 4.1 billion yuan worth of bad loans to dedicated bad-loan asset managers in 2013, Chief Risk Officer Song Xianping said at an earnings briefing in Hong Kong.

Non performing loans reached 87.8 billion yuan by the end of December, the bank said.

The fears of loan defaults follow a broad range of indicators that have depicted a slowdown in China’s economy in recent months.

The weaker economy has put pressure on banks ability to raise, and maintain, capital. AgBank’s tier-one capital ratio, a key measure of a bank’s ability to absorb losses, dipped to 9.25 percent at the end of 2013 from 9.35 percent at end-September.

The bank, however, maintained a dividend payout ratio of 35 percent, meeting a target that analysts had flagged as an important indicator of its confidence in its asset quality. A lower dividend ratio would have enabled the bank to boost its capital through retained earnings.

“Greater efforts were made for the disposal of non-performing assets and write-off of bad debts to maintain the stability of our asset quality,” President Zhang Yun in the earnings statement.

The China Banking Regulatory Commission requires AgBank and other large lenders to meet a tier-one ratio of 7.9 percent by the end of 2014 and 9.5 percent by 2018 as it aggressively implements new capital adequacy standards introduced last year in line with the global rules known as Basel III.

To support banks capital-raising efforts, regulators are encouraging lenders to use hybrid instruments, which combine elements of debt and equity.

Last week, China’s securities regulator unveiled rules for a pilot programme to allow banks and other listed firms to issue preferred shares, a form of equity that offers fixed dividends and is less dilutive than common equity.

AgBank said it had prepared a plan to issue preferred shares and is awaiting more detailed rules from regulators before proceeding. ($1 = 6.1888 Chinese Yuan) (Additional reporting by Shanghai Newsroom and Lawrence White; Editing by Miral Fahmy)

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