Commercial Banks Loan-loss Coverage Ratio Up at 134.3%

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China's commercial banks had a combined provision coverage ratio of 134.3 percent at the end of June, up 17.9 percentage points from the beginning of the year, the banking regulator said

The ratio was up 10.4 percentage points from the end of March, the China Banking Regulatory Commission said in a July 17 statement on its Web site.

The authorities have consistently been encouraging banks to raise their loan-loss coverage, reflecting fears that the massive surge in new credit extended in the first half may lead to a rise in bad loans.

In the second quarter, banks extended 2.79 trillion yuan in new loans, down 39.1 percent from the first quarter.

However, the momentum behind the credit surge has not slowed, as June lending hit 1.53 trillion, more than double that extended in April and May.

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The CBRC said in a separate statement that the non-performing loan ratio for banks was 1.77 percent at the end of June, down 0.65 percentage points from the beginning of the year. Outstanding bad loans totaled 518.1 billion yuan in the same period, down 42.2 billion from the beginning of 2009.

"Rising provision coverage ratios will affect banks' profitability," an official with a listed commercial bank told Caijing.

Assuming loan quality does not deteriorate in the second half, banks have the option to divert provisioning funds to boost immediate profit, he said.

The provision coverage ratio of small- and medium-sized banks hit a record high, an official with a joint-stock bank told Caijing, without elaborating.

The decline in the NPL ratio coupled with a lower-than-expected number of bankruptcies among small and medium-sized enterprises means lenders are likely to book higher first-half profits than previously forecast, even though income from trading services has fallen, he said.

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CBRC chairman Liu Mingkang said in January that banks should maintain a provision coverage ratio of over 130 percent, or at least 150 percent for those exposed to higher risks.

At the end of the first quarter, 14 out of the 17 major commercial banks satisfied the 130 percent requirement. Notably, Fujian-based Industrial Bank and Pudong Development Bank had provision coverage ratios of more than 200 percent.

Industrial and Commercial Bank of China, Bank of China and Agricultural Bank of China failed to meet the requirement in the first quarter, with loan-loss coverage ratios at 129.2 percent, 124.8 percent and 74.8 percent, respectively.

The joint-stock bank official said the minimum provision coverage ratio should be flexible, dependent on the situation.

"The structure and volume of loans, as well as risk management style and capabilities, differ among banks, so it is not reasonable to carry a unified standard," he said.