China's banks cut bad debt buffer as profits flatline

By Engen Tham and Matthew Miller

SHANGHAI/BEIJING (Reuters) - Three of China's Big Five lenders said they cut their loan-loss allowance ratio to around 150 percent, an indication the banking regulator may be lowering the amount of cash some banks need to set aside for future losses.

For China's big commercial banks, the move allows lenders to report stable earnings, even as the volume of bad loans rise and revenue from traditional lending declines, analysts say.

"It's a compromise," said Patricia Cheng, Head of China Financial Research for CLSA in Hong Kong. "Even though banks are sitting on less buffer, they are hoping that with monetary easing, defaults can be managed."

The provision ratio, which measures funds set aside for future losses as a percentage of current non-performing loans, is meant to buffer bank balance sheets against future losses.

Industrial and Commercial Bank of China Ltd (ICBC) (1398.HK), the world's largest bank, reported this week it cut its loan-loss allowance ratio to 141.21 percent at the end of March, from 156.34 percent at the end of December, while at Bank of China (BoC) (3988.HK), the ratio fell to 149.07 percent.

China Construction Bank Corp , the country's second-biggest lender, reported on Friday its loan-loss allowance ratio reached 151.71 percent, a slight increase.

Bank of Communications Co Ltd (BoCom) (3328.HK) said its provision ratio declined to 151.24 percent over the three-month period from 155.57 percent.

The China Banking Regulatory Commission (CBRC), which had mandated provision coverage ratios of 150 percent for commercial lenders, has yet to officially comment.

BoC, in an emailed statement, said the fall in coverage ratio was due mainly to an increase in bad debt write-offs, and maintained that its provisions ratio remained higher than other global systemically important banks.

ICBC did not immediately respond to requests for comment.

FLAT PROFIT GROWTH

On Thursday, ICBC, BoCom and Agricultural Bank of China Ltd (AgBank) (1288.HK) reported negligible profit growth.

On Tuesday, BoC said its net profits rose 1.7 percent in the first quarter.

CCB posted a 1.4 percent rise in profit to 67.95 billion yuan (7.16 billion pounds).

While non-performing loan ratios remained stable, the volume of NPLs for the Big Five lenders increased in the three-month period by 53.2 billion yuan ($8.21 billion).

"There is no question that there is a bit of earnings management going on here," said Matthew Smith a banking analyst at Macquarie. "This is not unique to the Chinese banks. Banks pretty much everywhere do the same thing."

"We're expecting NPLs to grow further, but they want to use this to smooth earnings in the coming quarters," said Edmond Law, a banks analyst at UOB Kay Hian (Hong Kong) Ltd.

Even with declining provision ratios, analysts said China's banks were well positioned to stave off the anticipated rise in bad debts.

For China's banks, which started building loan-loss reserves following the credit boom of 2009, provision ratios system-wide at the end of last year exceeded 180 percent, about three times the average for U.S. banks, said Sophie Jiang, Nomura's Head of Hong Kong and China banks research.

"As NPLs get recognised, the banks should be allowed to use the buffers they put aside over the past many years," said Jiang, who estimates that NPL ratios will normalise at a higher level, while NPL coverage ratios will normalise to a floor of 120 percent by the end of the year.

China's bank shares have been under selling pressure with the CSI 300 Banks Index down more than 20 percent from June peaks.

(Editing by Jacqueline Wong and Nick Macfie)