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Top Chinese banks cut payouts as BOC head bemoans new normal

Thursday, March 31, 2016 - 11:15

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The nation's largest state-controlled lenders cut their dividend payouts for last year amid rising bad loans, underscoring what Bank of China Ltd.'s president described as a "new normal" of low profit growth for the lenders.

[BEIJING] The nation's largest state-controlled lenders cut their dividend payouts for last year amid rising bad loans, underscoring what Bank of China Ltd.'s president described as a "new normal" of low profit growth for the lenders.

The comment from Bank of China's Chen Siqing came at a media briefing Wednesday after his company and largest rival Industrial & Commercial Bank of China Ltd reported their weakest profit growth in at least a decade. Later that evening, China Construction Bank Corp posted net income that rose just 0.1 per cent.

The percentage of income all three paid out as dividends fell to about 30 per cent from 33 per cent in 2014, as the lenders sought to preserve capital under pressure from the highest levels of Chinese bad loans in a decade.

Slowing economic growth is undermining more than a decade of annual profit gains at the lenders and hurting their ability to return money to shareholders.

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"The era of double-digit profit growth has ended and we are in a single-digit growth period now," Mr Chen said. "It's impossible for banks to maintain high profit growth amid a slowing economy and rising risks, so we are also in a new normal."

Shares of ICBC in Hong Kong dropped 0.5 per cent as of 10.12 am local time on Thursday.

Bank of China gained 0.3 per cent, while Construction Bank lost 1 per cent. The three stocks lost more than 20 per cent in the past year.

Against the backdrop of the slowing economy, turmoil in the stock market and government measures to curb overcapacity in manufacturing, bad debt in China's banking industry jumped 51 per cent last year to 1.27 trillion yuan (S$265.42 billion), data from the bank regulator show.

ICBC had 179.5 billion yuan of nonperforming loans as of December, an increase of 44 per cent from a year earlier, the bank reported to Hong Kong's stock exchange.

Bank of China's nonperforming loans rose 30 per cent, while Construction Bank's jumped 47 per cent, their filings show.

The government is considering various measures to bolster lenders' balance sheets, including cutting the minimum amount that banks have to set aside to cover their bad loans.

Authorities are also drafting rules to make it easier for banks to convert bad loans into equity stakes in debtor companies, while regulators will allow domestic banks to issue bad loan-backed securities to remove soured credit from their books, people familiar with the two measures have said.

The three banks' bad-loan coverage ratios by the end of last year had fallen to just above the current regulatory minimum of 150 per cent even as they boosted provisions by at least 23 per cent.

ICBC's ratio dropped to 156 per cent from 207 per cent in 2014, while Bank of China's slid to 153 per cent from 188 per cent.

"There's a high chance that the regulator will cut the bad-loan coverage requirement, which is too high compared with global peers," said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co.

"Without that happening this year, the big banks will have trouble maintaining their current dividend payout level."

ICBC said it returned 83.2 billion yuan to shareholders last year, an 8.6 per cent drop from 2014. The payouts by Bank of China and Construction Bank fell by about 8 per cent and 9 per cent, respectively.

Worsening asset quality is weighing on profits just as central bank interest-rate cuts to combat deflation put pressure on lending margins and the government deregulates finance to intensify competition.

The People's Bank of China cut interest rates six times since November 2014 and removed a cap on deposit rates in October.

Concern about bad loans and future dividends dragged valuations for the five largest Chinese lenders' Hong Kong shares to an average of their 0.55 times estimated book value in February, the lowest on record according to Bloomberg-compiled data.

"It wasn't an easy job for China banks to achieve positive profit growth through the operating environment last year," ICBC Chairman Jiang Jianqing told reporters in Hong Kong on Wednesday. "The global economy was very complicated."

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