Banks to sell US$30.2b bad loans
(Agencies)
Updated: 2004-06-22 15:26

China Construction Bank and Bank of China are set to sell bad loans with a face value of 250 billion yuan (US$30.2 billion) as early this week, to help them prepare for share sales, said two asset managers bidding for the debt.

Huarong Asset Management Corp, Cinda Asset Management Corp, China Orient Asset Management Corp and Great Wall Asset Management Corp, formed in 1999 to dispose of bad loans from the nation's four biggest banks, are planning to buy the soured loans at auction, the first time they'll be able to purchase the assets at a discount, said Zhu Dengshan, Cinda's chairman.

The nation's second- and third-biggest banks will first sell the non-performing loans to the People's Bank of China at half the book value of the assets, Zhu said. The central bank will then sell the soured assets to the highest bidder, he said.

"We have put in a bid and hope to be able to buy the loans and repackage them and sell them off," said Su Dechang, general manager of the Shanghai office of Orient, which handles Bank of China's bad loans. "There are some assets that have a high recovery rate."

China's four biggest State banks, including Industrial & Commercial Bank of China and Agricultural Bank of China, are burdened with 1.89 trillion yuan (US$228 billion) of non-performing loans or about 19 percent of total lending after five decades of lending to unprofitable state companies.

The four asset management companies sold 509.4 billion yuan of bad loans by the end of 2003, according to the China Banking Regulatory Commission reported on its Web Site.

Recovery Rate

They recovered 99 billion yuan in cash, or 19.5 percent of the total, the commission said.

The banks have been trying to reduce their bad debt ratios as Premier Wen Jiabao calls for them to reorganize ahead of a 2007 deadline when China will open its banking industry to more foreign competition.

China spent US$45 billion bailing out Construction Bank and Bank of China in December, part of a three-prong strategy to help them reduce bad loans, reorganize and sell shares overseas.

"They are moving in the right direction," said Manggi Habir, a director for the financial institutions group at Standard & Poor's in Singapore. "The other thing is to try and collect from the NPLs, which is harder to do."

The asset managers bought 1.4 trillion yuan in bad assets at face value from state-run banks, starting in 1999. The government spent 270 billion yuan boosting capital at the big four lenders in 1998.

Share Sales

A call to Huarong, which manages Industrial Bank's bad loans, went unanswered. Great Wall, which disposes of Agricultural Bank's bad assets, declined to comment.

Construction Bank and Bank of China are the first of the big four state-owned lenders planning to sell shares publicly. Construction Bank said this month it will split itself into two companies as part of its reorganization for the sale.

Standard & Poor's says bad debt at all Chinese financial institutions could be as high as 40 percent of total lending, and estimates it would cost $656 billion for China to bail out the entire banking system. That's equivalent to 43 percent of the country's targeted 2004 gross domestic product.

Construction Bank's bad-loan ratio, while the lowest of China's big four state banks, is about three times higher than the 2.94 percent average at 215 financial institutions based in Hong Kong. HSBC, the world's second-biggest bank by market value, had a non-performing loan ratio of 2.8 percent at the end of 2003, according to its annual report.

Legacy

"It is all legacy from the old days, so no matter what, it will take time to resolve," said S&P's Manggi. "It is not an easy exercise."

Huarong's first sale, which closed in March, took almost three years to complete as it awaited official approval. It sold debt then with a face value of $1.5 billion to groups led by Goldman Sachs Group Inc. and Morgan Stanley.

In its second sale, it sold less than a fifth of the bad loans with a face value of $3 billion it auctioned because the bids for the rest were too low. It received 11 bids for the 22 groups of bad loans -- less than the 20 expressions of interest it said it had received at the beginning of December. The three lots sold amount to less than 20 percent or 4.4 billion yuan of the 22.22 billion yuan that received bids in the auction.

Ernst & Young LLP advised Huarong on the two auctions.

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