The View | Chinese banks are suddenly being frank about the non-performing loans mystery
Under pressure to pay out a steady flow of dividends, some state-owned banks are ‘smoothing’ quarterly earnings
Here’s something you don’t hear often from companies: “We’d like to apply tougher accounting standards, but our government won’t let us.”
This is the odd but interesting spin that many Chinese banks are putting on their latest set of results, in which most major financial institutions lowered their coverage ratios for bad loans; they did this not because levels of credit stress have improved, but rather as an easy accounting tweak to boost results after a tough third quarter.
We believe the reported results highlight that the largest state-owned banks may have obtained consent from the banking regulator to operate on lower levels of bad loan coverage
We know this not only because it is obvious, but because bank executives and spin doctors said so.
In an odd way, it is a sign of sophistication that banks did not even try to defend the smaller coverage ratio as a reflection of increasingly safe fundamentals.
Rather, they told analysts that as much as they would like to be more conservative in their treatment of non-performing loans (NPLs), Beijing insists they protect profits and dividends.
“While top line pressure is expected to continue, banks still face pressure from the government to maintain flat earnings growth, which is unlikely to be achieved without further lowering NPL coverage ratio,” Citigroup explained in a note to clients.
