Bank of China Ltd. said it will double down on credit risk control in 2022 after its buffer against bad loans grew at the slowest pace in at least four years.
The nation's fourth-largest bank by assets earmarked 390.54 billion yuan as loan loss provisions in 2021, up 5.9% from a year earlier, according to the lender's full-year earnings announcement March 29. The bank's loan loss provisions, an indicator of asset quality in the near future, grew by between 7.3% and 20.4% year over year from 2018 to 2020.
Its 2021-end loan loss provision coverage ratio rose to 187% of delinquent debt that is unlikely to be recovered, the highest in at least five years. A higher ratio indicates improved ability to withstand future losses on bad loans.
As of 2021-end, Bank of China's nonperforming loan ratio fell to 1.33% from 1.46% a year earlier, in part due to a faster sale of bad loans. The bank's impairment losses on assets, which include loans and other financial investments, fell 12.4% to 104.22 billion yuan in 2021 from a year earlier.
"We will be even more proactive in risk control in 2022," Liu Jiandong, chief risk officer of the bank, told a press conference after the lender reported 12.3% year-over-year growth in net profit for 2021.
Pressure on credit risk forecasting and monitoring comes from sectors facing liquidity stress, such as real estate and local governments, Liu said. Uncertain global economic outlook, insufficient demand, and volatile capital and commodities markets are also weighing on the repayment ability of the manufacturing and external trade sectors, Liu said.
China Merchants Bank Co. Ltd. and Industrial Bank Co. Ltd., the nation's sixth- and eighth-largest lenders by assets, also reported lower nonperforming loan ratios and higher coverage ratios for 2021.
There is incentive for banks to be stringent on provisioning, said Michael Zeng, Hong Kong-based banking analyst at Daiwa Capital Markets. "Regulators would like to see the release of risk through making provision while banks, even though dragging their bottom lines, would see this as a gesture of sharing profit in response to the theme of common prosperity," Zeng said.
Slowing economy
While major Chinese banks including Bank of China have limited direct loan exposure to beleaguered property developers, the knock-on effect on the wider economy has been weighing on the lenders' asset quality and profitability. In addition to the property market slowdown, strict border control and lockdown policies amid recurring COVID-19 outbreaks, alongside various policies to address inequality under its national objective of "common prosperity," have raised concerns about borrowers' ability to make repayments and overall loan demand.
Bank of China expects its yuan loan book to expand by more than 10% in 2022, after growing 10.5% in 2021, Executive Vice President Wang Zhiheng said.
Major growth in loan demand will likely come from sectors including infrastructure, transportation, utilities and low-carbon industries, Wang said.
In 2021, the outstanding loan balance to small businesses, or so-called inclusive finance, rose 53.2% to 881.5 billion yuan in 2021 from a year earlier. Banks in China are heeding the government's call to lend more aggressively to small businesses to help them survive the current economic slowdown.
"The credit risk of these loans will likely be lagging. The NPL ratio of these loans may be slightly higher than that of ordinary loans, but it's all expected and manageable," said Executive Vice President Wang Wei.
The Chinese economy could grow 5.5%, according to the goal unveiled in the ruling party's annual political meetings in early March. Banks, especially state-owned ones, are expected to issue more loans to help the country meet the growth target.
People's Bank of China is expected to support credit supply by cutting interest rates and lowering the reserve requirement ratio for banks, analysts said. The government may also roll out more measures to revive the sluggish property sector, which is a major component of the nation's GDP, by relaxing restrictions on home purchases, among other things, analysts said.
As of March 28, US$1 was equivalent to 6.37 Chinese yuan.