2014-04-20

Bad Loans: 100 Billion in 2013, 60 Billion in First Two Months of 2014; Tricks For Hiding NPLs

Banks Saw Value of Bad Loans Rise Last Year, Annual Reports Show
The total value of non-performing loans at 12 major banks was 467 billion yuan on December 31, an increase of 76.3 billion yuan, or 19.5 percent, from the beginning of 2013.
Earlier data from the regulator shows the entire banking industry's bad loans increased by 99.2 billion yuan last year to 592.1 billion yuan, with the average non-performing loan ratio reaching 1 percent, compared with the 0.95 percent a year earlier.

The total amount of bad loans may have increased by another 60 billion yuan in the first two months of this year, an executive of a large bank said.
Also recall that at least one bank, Bank of China, shuffles bad debts from its banking division to its investment banking division to avoid recording the bad debt.

"Bad loans in general are showing signs of spreading and contagion," a senior banking analyst said. "In 2012, they were concentrated in relatively small industries such as trading companies. The next year they spread to big ones and big enterprises."

Among the defaulters were subsidiaries of big state-owned enterprises (SOEs), which banks normally view as safe clients, a loan officer at a joint-stock bank said. In many cases, he added, the parent SOEs did not save their subsidiaries mostly because they were in deep trouble themselves.

Data from the China Iron and Steel Association, a trade organization, shows that the debt-to-asset ratios of many of country's major steel-producing and trading companies, most of them SOEs, have passed the 70 percent red line.

The association's data also shows that at the end of last year the top 86 steel manufacturers and traders in the country owed banks 1.33 trillion yuan and other creditors another 1.76 trillion yuan.
There is no consensus about the value of the loans that cannot be repaid. A source close to the banking regulator said it was 1.5 trillion yuan, with large SOEs especially indebted.

Coal miners are also struggling.
Coal and steel are north-northeast industries. How about the south?

The current size of bad loans is still controllable, but it is set to rise and certain sectors will face more pressure than others, said Zeng Gang, director of the Banking Research Office at the Chinese Academy of Social Sciences.

The non-performing loan ratio of some small banks in the Yangtze River Delta, Pearl River Delta and the coastal regions near the Bohai Sea in the northeast has reached up to 4 percent, he said.

Several bank executives have said their bad loans came primarily from the two delta regions. Sun Deshun, vice president of China Citic Bank, said 68 percent of the bank's bad loans were in the Yangtze River Delta.

Song Xianping, director of risk management at the Agricultural Bank of China (ABC), said companies in Wenzhou, an entrepreneurial hub in the Yangtze River Delta, were among the most heavily indebted.
Let the asset sale begin:
At the end of 2013, the non-performing loan ratio of financial institutions in Zhejiang Province, in the Yangtze River Delta, was 1.84 percent, data from the provincial banking regulator shows. The figure for Wenzhou was 4.41 percent.

To cope with increased bad loans, many lenders have turned to write-offs and transfers. The 12 major banks' annual reports show that they wrote off and sold 102 billion yuan worth of bad loans last year, up 206 percent. Of that, the Big Five state-owned banks wrote off and sold loans worth 64.7 billion yuan, up 159 percent.

Some of the bad loans were sold to asset management companies. Zang Jingfan, president of China Cinda Asset Management Co. Ltd. said earlier that there are abundant opportunities to acquire bad loans in "areas of excessive production capacity, industries of environmental protection that need to be upgraded, steel trade and cement production, and the real estate sector."

How does this situation affect the banks? 新增不良贷款逾600亿 银行全线收紧贷款审批发放
Reporter investigation showed that the current increase in Guangzhou, Foshan banks' bad loans, regulators are troubleshooting the relevant circumstances, where a branch of a bank NPL ratio even more than 50%.
That is not mistranslated. The NPL ratio is reportedly over 50% at a bank in Foshan.
Since the start of the second quarter, the bank has tightened loan approval and disbursement across the board, some banks will not entertain the idea of loans, mortgages approved facility has also been reduced, loan approval and thresholds have entered the "strictest" period.

......"Last year, the start of credit approval returned to the level of the head office, branches are basically not doing it." Said a joint-stock bank branch manager in an interview with reporters.

......Other mortgage loans also see delays, interest rates go up, stringent approval conditions. "Before mortgage can get 70%, now only grant a quota of 655 percent or so." A bank loan officer told reporters.

How are banks hiding the pile up of bad debt? 银行不良指标调节术:从认定到处置的公开秘密 (Bad Debt Adjustment Techniques: From Determination to Disposal)
At the determination stage, methods to control bad debt include the technical, such as adjusting the loan classification criteria and parameters; business tools, such as loan extension, issue new debt to pay old debt, translation, etc.

Bad debt disposal includes clearance received, restructuring, transfer, write-offs and so on. Recovery, commission collection and disposal of clearance received, litigation, etc.; reorganization as reduction in interest, adjust the terms, adjust the interest rate term, swap debt for equity, etc.; transfers, including open transfer, asset securitization, structured transactions.

"New bad loans," the adjustment occurs only in the identified stages, "bad loans" and "bad rate" is affected by the two-stage operation, in which the defect rate is also affected by the credit scale denominator factor.

......In fact differences between the banks lending criteria and parameters for classification do exist. Galaxy Securities banking analyst Huangbin Hui said that these differences can be seen in bank financial statements based on the calculation of total loans more than 90 days past due / non-performing loan balance, or (concern loans + NPL) / total overdue loans contrast. In general, the standard line of state-owned banks more stringent compared to some of the shares.

In addition to the different parameters, technical operations, loan classification error will appear subjective or objective. "For example, some concern loans are actually subprime loans, but sometimes may delay adjustment classification, did not make real." Above the state-owned bank said that the regulatory authorities will carry out checks on loan classification periodic deviation in touch clear adverse classification and statistical accuracy, the true extent.

He therefore believes that the bad loan determination stage, compared to techniques, the use of means to control business loan classification downward migration rate, adjustment is the largest.

......Wang is a trust manager of the Trust, one of his regular business operations for the bank's corporate customers old new borrowing short-term bridge loan.

Under normal circumstances, the banks require companies to repay a loan, grant new loans to the middle there is a time difference, the so-called bridge loan is to provide financial support for enterprises within the time difference.

"To ensure that companies can get the new loan to repay the loan, the loan approval letter that we must see the new loan providing bridge loans, which is critical operations." Wang stressed.

A banking source told reporters in Jiangsu and Zhejiang, Jiangsu and Zhejiang in many local governments, small towns, various trade associations are set up for "lending" the Fund, its function is to play the role of one of these bridge loans, but the specific operations like finance institutions are less stringent.

In addition, the bank also has loan interest relief through increased future credit facilities and other means to recover overdue loan principal in a timely manner. There are people in the industry said that the future of asset securitization should also be one of the means to control bad bank added.

......Bad loans recognition directly effects the newly recognized amount of NPLs, thereby affecting NPL balance and NPL rate of two indicators, while NPL disposal's main goal is to reduce the actual amount of non-performing loans, to reduce the NPL rate.

Recovery, restructuring, transfer, write-offs, etc., disposal of bad loans is a relatively continuous process.

When performing loans are classified as bad loans, the banks first do everything possible to collect the debt. According to industry experience, including the demand that the Qing Qing receive income, received clearance joint commission collection and disposal of clearance received, an action for closing a variety of ways.

Branch president introduced a stock line, summon a relatively early work, if the company really is because of funding problems repayment difficulties, the bank will set up a joint rapid activist group, and apply to the court in a timely manner before the complaint or litigation preservation of property. Litigation collection and disposal of clearance of the normal measures taken after the failure of the debt restructuring is an attempt, when companies go bankrupt, will direct the prosecution or disposition of collateral.

When it is slightly larger scale corporate loans adverse, as often involves more creditors, banks generally will first attempt to debt restructuring to save the business to reduce adverse. For example, because the debt problem is well-known Lend Lease Group, Hai Xin steel.

Debt restructuring process, the banks and other financial institutions generally require temporary concessions, including the reduction of interest rates to adjust the deadlines. For individual companies, the bank will adopt debt to equity, debt, etc. for the purpose of transforming bad, bad confirm the above mentioned loan translation stage, lending and other operations are also still apply.

Transfer is the primary means of disposal of non-performing bank and an important part. Because bank loans generally have guarantees and collateral, clearing income, or after the reorganization process, the creditor banks are likely to be transferred.

Including the transfer of packaged open transfer, asset securitization, structured transactions, among which the transfer of the main pack, asset securitization, structured transactions operate relatively rare cases.

2008 CCB issued the national inter-bank market "restructuring Jianyuan 2008-1 asset securitization" is a non-performing loan assets securitized products issued by banks first.

"Structured transactions are part of the assets the bank transferring ownership and usufruct, so that banks can achieve a balance sheet, the buyer is responsible for clearing the closing, the bank can continue to keep part of the proceeds of the asset." One bank investment banking insiders.

In addition to these tangible means of disposal, transfer, repurchase agreements with banks also operate large, it is clear that its purpose is also to temporarily adjust the bad bank indicator.

Loans classified as non-performing, general and provision for impairment in accordance with certain criteria, thus affecting the banking profit or loss.

Finally, through a variety of efforts to identify only those without any possibility of recovery or decrease of non-performing loans have become bad debts before they carry out verification from the bank profits. After verification, the corresponding non-performing loan amount is also deducted from the balance of the statistics.

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