China's mounting bad debts have fewer places to go

China Bohai Bank

07/08/2024 04:04

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Robyn Mak
       HONG KONG, Aug 7 (Reuters Breakingviews) - Tackling
China's $470 billion bad debt pile is getting harder. China
Bohai Bank  9668.HK , which is 16%-owned by Standard Chartered
 STAN.L , recently said it's selling non-performing assets worth
$4 billion. It underscores the pressure lenders are under as the
country's property bubble bursts. Yet buyers are feeling the
strain too.
    Bohai Bank, based in the northern metropolis of Tianjin, has
been hit hard by the country's property slump and slowing
economic growth. The region, among China's most indebted, has
grappled with plunging real estate prices - once a vital source
of local government revenue - and overcapacity in its
manufacturing sectors. Last year, nearly half of Bohai Bank's
932 billion yuan ($129 billion) loan book was in northern and
northeastern China, where its profit before tax plunged to 1.7
billion yuan, down from 5.5 billion yuan in 2021. The bank's
Hong Kong-listed stock is down 80% over the same period.
        The $2 billion lender had 16.5 billion yuan of
non-performing loans (NPLs), or 1.8% of total gross loans, as of
December. But combined with special-mention loans - slightly
less risky debt than NPLs - problem loans made up almost 5%.
Bohai Bank plans to sell assets worth 29 billion yuan, which
includes the principal, interest and such, at an up to roughly
40% discount. The bank will take a 3.8 billion yuan hit, 
equivalent to more than three-quarters of its 2023 net profit.
    It's a chunky sale: though the assets account for less than
2% of Bohai Bank's total, the amount is 54% more than the
non-performing assets the group disposed of in all of 2023. The
seller appears to be getting a better deal, too. The average
haircut on the principal for similar deals in Tianjin over the
past three years was 71.7%, according to Bohai Bank.
    The transaction comes at an awkward time for asset
management companies known as bad banks. Beijing created the Big
Four - China Cinda Asset Management  1359.HK , China Orient
Asset Management, China Citic Financial Asset Management
 2799.HK  and China Great Wall Asset Management - in 1998 to
acquire bad debts from the country's four largest lenders. 
    But after years of rapid expansion, their balance sheets,
capital base and profitability are all under strain. Last month,
Cinda, considered to be the strongest of the four and one of the
six bidders for Bohai Bank's assets, warned its first-half
earnings could fall by up to 50% from a year earlier. Meanwhile,
the country's banks hold $1.1 trillion of non-performing and
special-mention loans, government data show, a 29% increase
since the end of 2019.
        That suggests buyers will increasingly be driving a
harder bargain, making disposals like Bohai Bank's trickier to
pull off.
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    CONTEXT NEWS
    China Bohai Bank on July 22 said it intends to sell assets
worth 29 billion yuan ($4 billion) via a public tender process
to six potential buyers. The assets primarily comprise of debt
owed by 53 entities and includes 25.6 billion yuan of principal,
2 billion yuan of interest and 1.3 billion yuan in penalties.
    The bank, which is 16.2%-owned by Standard Chartered,
expects to sell the assets at up to a 40% discount, which will
result in a financial hit of 3.9 billion yuan, according to a
filing.
    As of the end of the first quarter of 2024, Chinese
commercial banks had 3.4 trillion yuan ($469.21 billion) of
non-performing loans, up by 141.4 billion yuan from the previous
quarter, according to official statistics.

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Graphic: China's risky bank debts are piling up    https://reut.rs/4cmiMtA
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 (Editing by Antony Currie and Ujjaini Dutta)
 ((For previous columns by the author, Reuters customers can
click on  MAK/   
robyn.mak@thomsonreuters.com))