China Construction Bank's NPLs likely to rebound in 2H13

But CCB can maintain steady asset quality.

According to Barclays, in 1H13, CCB’s gross new NPLs were about RMB 20bn, implying a 0.54% annualized gross NPL formation rate.

Here's more from Barclays:

The bank wrote off RMB 5.3bn in 1H13, up 360% y/y, as its coverage ratio was too high, management said. Management also suggested that the bank on average processed RMB 32-33bn and wrote-off RMB 8bn of NPLs per year in the past few years.

However, it has not disposed of the NPLs for asset management companies in the past few years as the recovery rates were low compared with resolving the NPLs one-by-one by the bank.

CCB controlled its top 20 NPLs in 1H13 and reduced the loan balance in some over-capacity sectors. At end-June 2013:
- its total loan balance to the shipbuilding sector was RMB 10.1bn, -RMB 1.2bn ytd. Total NPLs for the sector were about RMB 1.2bn for a 12% NPL ratio.
- its total loan/NPL balances to the steel trading and solar industries were RMB 30bn/9bn and RMB 13.3bn/1.6bn, respectively; therefore, its NPL ratios were 25% and 12%, respectively.
- NPLs for SME lending were RMB 26.5bn. The NPL ratios of small enterprises and medium-size enterprises were 3.5% and 1.8% respectively, significantly higher than the 0.99% for the whole bank.

Management said that 98% of LGFV loans were generally or fully covered by cash flows. The NPLs of LGFV loans were RMB 900m. 50% of LGFV loans are said to mature within five years.

Management said that NPLs will likely rebound in 2H13 due to the tight money supply and the economic slowdown. It said risk management remains challenging. However, it believes that CCB can maintain steady asset quality.