August 21, 2014 / 9:26 AM / 3 years ago

UPDATE 2-China's BoCom bank sees bad loans rising as economic slowdown hits manufacturers

* Q2 profit growth slows to 5.6 pct from 13 pct in 2013

* SMEs, steel industry, exporters in eastern areas all struggle

* BoCom to seek new private-sector investors (Recasts, adds NPL details, new investment, share performance)

By Lawrence White and Engen Tham

HONG KONG/SHANGHAI, Aug 21 (Reuters) - China’s Bank of Communications Co Ltd (BoCom) said on Thursday it expects bad loans to rise this year as businesses in major manufacturing regions suffer in a slowing economy, the second big lender to make such a forecast this week.

BoCom, China’s fifth largest lender, reported slowing profit growth and rising non-performing loans in the second quarter, joining Bank of China, the country’s fourth largest, which on Tuesday posted similar results and also forecast an increase in bad loans.

BoCom’s Chief Risk Officer Yang Dongping told reporters the highest concentration of non-performing loans were in the eastern regions of Jiangsu and Zhejiang, home to some of China’s biggest export-focused, manufacturing hubs.

Yang also said the bank expected to see a slight rise in non-performing loans over the next year, adding that the overall risk was “manageable”. China’s economic growth is expected to slow to 7.5 percent in 2014 from 7.7 percent a year ago.

Zhejiang and Jiangsu are located in the Yangtze River Delta, an area which in 2012 accounted for half of China’s exports but which has recently seen an increase in credit risk due to the economic slowdown.

Like Bank of China, BoCom said steel and wholesale industries in the eastern regions were among those hardest hit.

“The bank’s asset quality was affected by the spreading of risks from steel trade businesses and privately-owned SMEs, mainly located in Jiangsu and Zhejiang regions,” BoCom said in its earnings statement. SMEs are small and medium enterprises.

BoCom said its ratio of bad loans rose to 1.13 percent in the second quarter from 1.09 percent at the end of March.

Its net profit rose 5.6 percent to 18.08 billion yuan in the quarter, according to a Reuters calculation from company figures, but the increase was much slower than the 13 percent second-quarter profit growth the bank reported in 2013.

CAPITAL PLANS

Most Chinese state-banks are trying to decrease the proportion of non-performing loans, which have spiked as economic growth slows. China’s bad loan levels rose to 1.08 percent at the end of June, according to official data, the highest ratio since 2011.

The lenders are also poised to raise a record $120 billion in funds over the next two years to shore up their balance sheets in the face of rising bad debts and to comply with stricter global capital requirements known as the Basel III rules.

BoCom’s capital adequacy rose to 12.75 percent, compared to 12.19 percent at end-March, partly from a change in the way it calculates that ratio.

BoCom is a joint-stock bank whose biggest shareholder is the Ministry of Finance with 27 percent, followed by HSBC Holdings PLC with 19 percent.

Reuters reported last month that BoCom is studying feasibility plans for so-called hybrid ownership, becoming the first state-controlled bank to pilot a scheme aimed at letting private capital play a bigger role in the economy.

$1 = 6.1510 Chinese yuan Additional reporting by David Lin in SHANGHAI; Editing by Miral Fahmy

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