Banks decline as stress tests heighten concern: China

[NEW YORK] Chinese banks retreated in New York amid concern credit risks may increase for lenders as a housing market slowdown in the Asian nation constrains their ability to recover their advances.

Industrial and Commercial Bank of China Ltd., the world's largest lender by assets, fell 2.7 per cent to US$14.66 in over- the-counter trading, the biggest drop in seven weeks. China Construction Bank Corp. and Bank of China Ltd. each slipped at least 2 per cent. The Bloomberg China-US Equity Index declined 1.7 per cent to 113.70 after four days of gains.

The financial stocks slumped as China's banking regulator in Shanghai asked local lenders to conduct the widest-ever tests on their exposure to the struggling real-estate industry. Authorities' and investors' concerns are mounting after data last week showed that Chinese lenders' bad-loan ratio increased the most in at least a decade. Chinese companies in New York followed declines in Hong Kong and Shanghai amid a slide in industrial companies' profits.

"The housing market's outlook is soft," Tony Hann, head of emerging markets at Blackfriars Asset Management Ltd. in London, said in e-mailed comments. "I would expect bad debts to increase." The housing market's weakness will weigh on banks as well as the broader economy "for a couple of years or so," he said.

The Shanghai branch of the China Banking Regulatory Commission requested that stress tests include all property- related industries and lending outside the city, according to people familiar with the matter who asked not to be identified as they weren't authorized to speak publicly.

Soured Credit The ratio of nonperforming loans rose 0.13 percentage point to 1.29 per cent of commercial banks' total advances as of December 31, the CBRC said in a statement January 23. That was the biggest increase in at least a decade. Banks' bad-loan coverage ratio, a measure of reserves for soured credit, fell to 230.5 per cent from 247 per cent in September, according to the CBRC.

Concerns about housing loan quality "are already very prevalent hence the low valuations of Chinese banks," Hann said. "For anyone who is bullish on property in China it does suggest that the sector is having a difficult time." Sales of new homes jumped last month for the first time in a year after an interest rate cut in November. For the full year of 2014, home sales fell 7.8 per cent amid a supply overhang following a multiyear building binge.

Default Concern Issuance of property-related products tumbled 62 per cent from a year earlier to 38.5 billion yuan (US$6.2 billion) in the fourth quarter, according to research firm Use Trust. Builders must repay 241 billion yuan of trusts in 2015, up from 178 billion yuan last year. Kaisa Group Holdings Ltd., which missed a US$23 million bond coupon payment this month, failed to repay a 2.5 billion yuan trust last week, people familiar with the matter said, heightening default speculations.

ICBC's American depositary receipts fell to a one-week low in the steepest slump since Dec. 9. ICBC trades at 5.6 times 12- month earnings, compared with an average multiple of 9.5 for 15 global peers. ADRs of China Construction Bank sank 2.5 per cent to US$16.12. Bank of China slid 2 per cent to US$14.27 in a third day of declines.

China Life Insurance Co., the nation's largest insurer, declined 2.7 per cent to US$61.78, falling the most in three weeks.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the largest US exchange-traded fund that tracks mainland Chinese stocks, dropped 1.6 per cent to US$36.56. The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the US, lost 1.9 per cent to US$42.89.

BLOOMBERG