ICBC : Industrial and Commercial Bank of China (1398)

[grubb]

I think CityFarmer meant that NPL ratio of 5% is relatively bearable in the event of a crisis
But yes, I'll have to agree, that 17% NPL is not considered "reasonable", much less "pessimistic 30%"
In the crisis, in 2011, the highest share of NPLs (in EU) was registered in Ireland and Lithuania, 16.1% and 16.3% respectively.
So at 16% plus its enough to cause mayhem, much less 30%.
Although again, I'll have to emphasize China has much greater reserves and flexibility with their currency than the EU states.

The data reference:
http://www.ebf-fbe.eu/uploads/FF2012.pdf
Page 10

I think the last banking crisis in China have not been mentioned here yet. Back in the late 1990s, Chinese banks had a crisis where NPLs were estimated to be as much as 40%. They were saved because the company set up 4 asset management companies which bought most of these loans. One of these asset management company is Cinda which is now listed on HKEX. A lot of the bad loans were also allowed to be rolled over so that the banks could recapitalize themselves slowly over time with retained earnings. There seems to be an idea that NPLs, if and when they explode, needs to be dealt with immediately, but historically this was not the case in China.

I think the path of least resistance is for the government to nationalize the bad debt. Unfortunately, this may turn out to be similar to what Japan did which has landed them with an unpayable debt of 200% debt-to-GDP.

[CityFarmer]

Since data always in doubt, especially on NPL (impairment allowance), let's supplement it with a guessing time:

The industrial guesstimate NPL ratio has a wide range, from as "optimistic" as 5%, to a "reasonable" 17%, to "pessimistic" of up to 30%.

Is the 8% impairment allowance high? Well, may be on the optimistic side...

I don't think NPL of 5% is considered "optimistic" as these are not subprime borrowers. 5% is often enough to wipe out most of the banks around the world. During the height of the last financial crisis, a lot of US banks has equity/asset of less than 5%. In that case, Basel III have to have a higher requirement for banks.

I doubt that there is any bank in the world being able to withstand 17% NPL, even as strong as Singapore banks.

The numbers are collected from interviews and articles read so far. It is a general view from the sector that I have summarized.

Is the 5%-17%-30% totally out of reality? One reality check, is the most recent China solution on NPLs (bad debts) in 1999, the AMCs. The ratio of assets transferred to AMCs over the total loans of the big-4 banks then, were 18%-25%. A reliable conclusion should be the NPLs were at least the ratio (assuming no more bad debt remains), or even more (some bad debt still with the big-4 banks). That was the bad time. Is the current NPL worst than before? I guess not as bad, lower but not too far apart

Ref: http://www.bis.org/publ/work115.pdf

With the reality check, is the 5%-17%-30% still realistic? I guess it should be. China banks are unique, and it is flaw to draw comparison with western banks, or any other banks outside China.

I do agree China bank will not fall, with the backing of China gov, another unique of China banks, isn't it?

(not vested in any China banks)

[create8value]

I think the last banking crisis in China have not been mentioned here yet. Back in the late 1990s, Chinese banks had a crisis where NPLs were estimated to be as much as 40%. They were saved because the company set up 4 asset management companies which bought most of these loans. One of these asset management company is Cinda which is now listed on HKEX. A lot of the bad loans were also allowed to be rolled over so that the banks could recapitalize themselves slowly over time with retained earnings. There seems to be an idea that NPLs, if and when they explode, needs to be dealt with immediately, but historically this was not the case in China.

I think the path of least resistance is for the government to nationalize the bad debt. Unfortunately, this may turn out to be similar to what Japan did which has landed them with an unpayable debt of 200% debt-to-GDP.

Japan's lost decade makes a very good comparison to Chinese current situation. I've found an article to share, eager to hear your thoughts.

The lessons for China from Japan's lost decade

03 September 2013 | By Andy Mukherjee Follow @twitterapi

Is China condemned to suffer a Japanese “lost decade”? Its economy today has three big similarities with Japan in the late 1980s: High and rising debt, diminishing export competitiveness and an ageing society. China can avoid slipping into Japan’s deflationary hole, but only if it learns from Tokyo’s failure to cleanse its banking system.

The most striking similarity between Japan in the late 1980s and China today is the level of debt. In 1989, total private credit in Japan was about 200 percent of GDP. It is around the same proportion of the economy in China now.

Another important parallel that doesn’t get as much attention is a rising currency - and diminishing export competitiveness. This is as big an issue for China today as it was for Japan a quarter century ago.

Following the 1985 Plaza accord, the yen appreciated by 30 percent against its trading partners’ currencies in 15 months, after adjusting for inflation. Japan responded to the loss of foreign demand by running loose fiscal and monetary policies. Eventually, it lost control of credit growth.

China’s exchange rate has risen more gradually. Yet, after taking into account galloping wage costs, the yuan has strengthened by 47 percent against other major currencies since 2005. Japan’s current account surplus - the excess of domestic saving over investment - shrank by just 2 percentage points of GDP between 1985 and 1989. By comparison, the drop in China’s current account surplus since the financial crisis has been massive: from 10 percent of GDP in 2007 to just 2.5 percent in the past four quarters.

China’s response to the crisis and recession in the developed world has been increased borrowing, particularly by local governments and by companies. Last year, interest costs ate up a quarter of the operating profit of the median Chinese company with a market value of more than 1 billion yuan, according to a Breakingviews analysis of Starmine data. A decade earlier, the bill was only 14 percent.

Ageing workers also put a limit on growth. Japan’s old-age dependency, or the ratio of the elderly to those of working age, was 17 percent in 1989, and the figure doubled over the next two decades. In China, the ratio is currently lower at 12 percent. But Beijing’s one-child policy means the country will age at a faster rate.

What overwhelmed the Japanese economy, though, was property mania. Residential land prices in Tokyo tripled between 1985 and 1988 before collapsing. As much of the speculation had been financed by credit, the financial system froze. However, Japan allowed its banks to hide their problems until 2004, when Prime Minister Junichiro Koizumi finally cleaned them up.

China’s authorities are in a similar bind: the country’s local governments have borrowed anywhere between $2.4 trillion and $2.9 trillion, according to an estimate by the deputy head of the National Audit Office, largely by pledging increasingly valuable land as collateral. On the one hand, regulators are keen to rein in further speculation. On the other, deflating the bubble could have unpleasant consequences for the economy. The temptation will be to hide the debt, either in the banking system or in government-owned bad banks. But failing to write down dud loans could clog up the system and impede new investment and growth.

China has some advantages. For one, it is still developing, while Japan’s urbanization was largely complete by the 1980s. City-dwellers in modern jobs may be able to support more household debt than rural workers. Similarly, increasing labour productivity will boost growth and gradually make China’s debt less burdensome. China’s controls on domestic deposit rates and on international capital flows also reduce the chances of a short-term debt crisis. That gives the leadership some breathing room to sort out its problems.

Yet China’s relative lack of economic development can also be a handicap. The real purchasing power of average Chinese incomes is still only a third of what it was in Japan in 1990. After almost two lost decades, Japan is still prosperous. By contrast, a lost decade in China would be more agonizing - both for its citizens, and for the rest of the world.

[specuvestor]

To add to this discussion:

1) After recaping the banks about 10 years ago, PRC IPO the big 4 banks. So they were recapitalised at that point to some extent, and to introduce stricter corporate governance as well as "sharing" of the equity risk. The aim then was to increase loan book so that the NPL ratio would decrease due to larger denominator.

2) Japan was based on the keiretsu model which is not exactly what the chinese banks are doing though people may argue that the banks also supports the SOEs, which is actually more govt directed.

3) China RMB exchange rate CURRENTLY is still cheaper than what it was pre AFC 1993 level before they devalued the Yuan, which indirectly led to the AFC.

4) People generally tend to underestimate the impact of NPL impact on banks' profitability and CAR ratio, underestimating leverage and the negative feedback loop. The below snippet is just an example. Nonetheless due to RRR of 20%, Chinese banks have L/D ratio of <80% and IMHO the biggest risk to China's NPL is not mortgage but SME and "municipal" related

By Jan Dahinten
Sept. 10 (Bloomberg) -- Banks’ safety margins against rise in bad loans at historical lows, suggesting higher risk to profits, UBS analyst Aakash Rawat writes in note to clients.
* If NPL ratio rises to 1.4%-1.5% of loans by 2015 vs 0.92% last reported by Singapore banks, and collateral values fall by 15%-20%, banks may need 20% of profits for higher provisions vs 1%-2% today
* DBS’s profits look “sensitive” with provisions at 1.4% of loans close to historical lows
* Rise in NPL ratio to 1.4%-5% and 15%-20% drop in collateral value by 2015 could mean ~20% impact on DBS’s profit, ~18%
for OCBC, ~12% for UOB
* NOTE: DBS Sees ‘No Signs of Stress’ in SME Loan Book so Far, UBS Says

[freedom]

It's very hard to take some financial commentators too serious as they don't put their money behind their opinions. Of course, in the end, if the NPL ratio is lower than what they claimed, they could just say, the banks used different methods to measure the NPLs. If they used my way, the NPL would be blah blah blah. They have never seen the loan books of the banks, but they dare determine how the banks should measure their NPL. Plus, the Chinese government and central bank has to be ultra incompetent to let the NPL ratio run out of control. It is not like they have no way to deal with it. The government can cut corporate tax to lower the burden of the corporates so that they can repay their loans slowly without default. The government also can cut personal income tax to spur consumer spending. The government(central) can issue more of its own debt to fund its spending after tax cut. The debt ratio of the central government is very low and it has trillions of worth of debt headroom. The government can improve its debt market so that some corporates will issue unsecured debt instead of seeking bank loans. It will not only increase the price transparency of the aggregate credit profile as the bank loans are opaque, but also move a lot of credit out of the banks' balance sheet, at the same time, provide a better return for investors who are seeking better return, but afraid of the risk of wealth management product. There are a lot of things the government can do and there is no reason to believe it will not do it.

The AMCs in their current form will be of little use this time. The loans now are of trillions, not billions like a decade ago. The most the 4 AMCs can take is a few hundred billion. The total credit extended in China is more than 100 trillion, event 5% is 5 trillion.

[CityFarmer]

It's very hard to take some financial commentators too serious as they don't put their money behind their opinions. Of course, in the end, if the NPL ratio is lower than what they claimed, they could just say, the banks used different methods to measure the NPLs. If they used my way, the NPL would be blah blah blah. They have never seen the loan books of the banks, but they dare determine how the banks should measure their NPL. Plus, the Chinese government and central bank has to be ultra incompetent to let the NPL ratio run out of control. It is not like they have no way to deal with it.

The AMCs in their current form will be of little use this time. The loans now are of trillions, not billions like a decade ago. The most the 4 AMCs can take is a few hundred billion. The total credit extended in China is more than 100 trillion, event 5% is 5 trillion.

Base on total outstanding loan of big-4 banks in FY2012 in my record, the loan amount was in the order of 25 trillion yuan. I doubt the current loan amount is more than 100 trillion yuan(?)

Google search gave the latest number as 54 trillion yuan
http://www.bloomberg.com/news/2013-07-31...-yuan.html

Furthermore the last AMCs exercise involved NPLs with face value of US$150-200 billion, which was equivalent of 900 billion - 1.2 trillion yuan (with US$=6 RMB rate)

After factor in the massive growth in GDP from 1999 till now, 15 years later, if AMC will be exercised again, I reckon it should be able to swallow much bigger NPL face value than just few hundred billion yuan

[freedom]

(fresh out of oven from PBOC released today)

total RMB loans 78.72 trillion. total loans, 83.94 trillion.

M2: 119.75 trillion (around the same as aggregate credit extend to the economy, mostly loans, bonds, entrusted loans, trust, etc) as a lot of economists claimed that certain off-balance sheet should go back to the balance sheet of the banks.

total RMB deposit 111.73 trillion, total deposit, 115.58 trillion

The question about AMC is where the equity is from? With 3 trillion RMB loans, assuming 10:1 leverage, 300 billion RMB additional equity required. Who is going to foot the bill? Huarong recently releases that half year profit less than 10 billion RMB. If someone is going to foot 300 billion RMB equity, he can well start a new bank with 300 billion RMB equity. with 15:1 leverage, it can extend another 4.5 trillion credit to the economy. Much better than buying expensive NPLs from the banks. With 4.5 trillion existing loans turning into cash, the leverage of the existing banks will be lower and the banks will be stronger.

[CityFarmer]

(fresh out of oven from PBOC released today)

total RMB loans 78.72 trillion. total loans, 83.94 trillion.

M2: 119.75 trillion (around the same as aggregate credit extend to the economy, mostly loans, bonds, entrusted loans, trust, etc) as a lot of economists claimed that certain off-balance sheet should go back to the balance sheet of the banks.

total RMB deposit 111.73 trillion, total deposit, 115.58 trillion

The question about AMC is where the equity is from? With 3 trillion RMB loans, assuming 10:1 leverage, 300 billion RMB additional equity required. Who is going to foot the bill? Huarong recently releases that half year profit less than 10 billion RMB. If someone is going to foot 300 billion RMB equity, he can well start a new bank with 300 billion RMB equity. with 15:1 leverage, it can extend another 4.5 trillion credit to the economy. Much better than buying expensive NPLs from the banks.

Buddies may be able to visualize the growth rate of bank loan in China. At the mid 2013, the loan amount was about 54 trillion yuan, and around 78 trillion yuan a year later. On average about 2 trillion yuan a month growth, Wow...

BTW, it is still lower than 100 trillion yuan, right?

As for the AMC question, I assume you refer to previous one. Where the AMCs' equity came from? The equity of the AMCs were mostly from issuing low-yield bonds to respective banks, and the banks were supported both by state at first, and recap via listing later.

[freedom]

100 trillion is a rough number. It also depends on how much you count those off-balance sheet ones. Some say they are banks' loan, some say they are wealth management product. I don't know where is your source of information. From what PBOC released before, the same measurement as mine, there were more than 70 trillion loans in the middle of 2013.
from Jan 2013 to Dec 2013:
total loans RMB loans
68.55 64.08
69.28 64.70
70.49 65.76
71.33 66.55
72.00 67.22
72.87 68.08
73.46 68.78
74.13 69.49
74.99 70.28
75.50 70.79
76.13 71.41
76.63 71.90

Not true. The equity was from the government, who then borrowed it from the banks at 2+% interest for god-knows how many years(MOF has not paid it today at least has not paid ICBC). Then the AMCs borrows more from the banks to hold the NPLs at 2+%, too. Overall, the banks are financing the NPLs, but most profits went to someone else. Why would the banks do it again when they can hold the NPLs much longer than last time and they are not wholly owned by the government any more?

[CityFarmer]

100 trillion is a rough number. It also depends on how much you count those off-balance sheet ones. Some say they are banks' loan, some say they are wealth management product. I don't know where is your source of information. From what PBOC released before, the same measurement as mine, there were more than 70 trillion loans in the middle of 2013.

Well, mine from Google, and from bloomberg.com, as stated in my previous post. Granted, there may be time lag from published date and source of data. Since your source is directly from PBOC, it should be the official one. Anyway, the different in the amount doesn't affect our conclusion.

Not true. The equity was from the government, who then borrowed it from the banks at 2+% interest for god-knows how many years(MOF has not paid it today at least has not paid ICBC). Then the AMCs borrows more from the banks to hold the NPLs at 2+%, too. Overall, the banks are financing the NPLs, but most profits went to someone else. Why would the banks do it again when they can hold the NPLs much longer than last time and they are not wholly owned by the government any more?

Well, your statement isn't too far different from mine, except the fund injected by state was borrowed

Yes, banks suffered the most amid the AMC exercise, no doubt on that. Why banks want to do it? Bank wasn't done it voluntary last round, and I reckon if it happen again, it is definitely not done voluntary by banks again.