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interest-generating assets, and the higher one also reflects the better profitability.12 In 2009 NIM of SOCBs all decreased compare to the previous year, because downwarding benchmark lending rate has reduced net interest income of SOCBs and also resulted in decending NIM. Because BOC has the smallest proportion of net interest revenue in its operating revenue; therefore, BOC suffers less than its peers from narrowing interest margin.
2.4 Evaluation of Assets Quality
NPL ratio is commonly used and also could be said as the most important indicator when examining assets quality of a bank.13
Central government of PROC was aware of the seriousness that how NPL can affect financial system in China and began to adopt measures to avoid NPL problems from deteriorating. In 1999 State Council passed the legislation of〈Regulations of Financial Asset Management Corporations 〉 to set up four asset management corporations (AMCs), they are China Cinda Asset Management Corporation, China Orient Asset Management Corporation, China Huarong Asset Management Corporation, and China Great Wall Asset Management Corporation. The main purpose to establish four AMCs is to solve and control NPL problems of SOCBs.
Before year 2000 NPL ratio of commercial banks in China top 50%, and the main reason was unlimited funding to state-owned enterprises and default ratios were pretty high. For a long period, domestic commercial banks in China have had always been criticized for high amounts and ratios of NPL, and many financial experts have warned that financial risk in China was extremely high (Chang, 2001).
12 Net Interest Margin= net interest revenue / average total earning assets
13 NPL ratio= impaired loans / (loans+ loan loss reserve)
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In addition, PBC made a notice regarding full implementation of management of five classification of loans quality system on December 19, 2001 and〈Loan Risk Classification Guidelines〉was wholly adopted in the beginning of year 2002. Various banks in China are required to classified loans into five categories according to specific standard of loans quality and report to PBC periodically.14
In compliance with the regulations of WTO, China has released restrictions on foreign banks to do RMB business since December 11, 2006, till now foreign banks have fully operate business in China more than three years. With overall change in financial environment and fierce competition brought from foreign banks, in this section I would like to make an observation of changes in ratios and amounts of NPL of China commercial banks to review how the effect that China government works on controlling NPL is.
Table 2-13 summarizes amounts and ratios of NPL of all kinds of commercial banks in China from 2006 to 2009. Before year 2007 NPL problem of banking sector in China was very serious, total amount of NPL in China banking were around RMB 1.2 trillion and NPL ratio remained very high between 6.17% and 7.09%. During the same period with NPL ratio in the range of 8.05% to 9.22% loans quality of SOCBs was the worst, and rural commercial banks ranked the second with NPL ratio in the range of 3.97% to 5.90%.
However, NPL ratio of different types of banking institution all dropped steadily year on year, from 2006 to 2009 NPL ratio of SOCBs decreased substantially from 9.22% to 1.80%; NPL ratio of JSCBs decreased from 2.81% to 0.95%; NPL ratio of city commercial banks decreased from 4.78% to 1.30%; NPL ratio of rural commercial
14 Objects of implementation include state-owned commercial banks, joint-stock commercial banks, city
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stable fluctuation in the range between 0.46 % and 0.85%.Second to foreign banks, JSCBs have very good assets quality attributing to its maintenance of low NPL ratios. As to foreign banks because they have good internal risk controlling system and strict reviewing process on issuing loans to customers which are commercial banks in China should improve and learn from them, and that is also why NPL ratios of foreign banks have always been the lowest one in comparison with other commercial banks.
Table 2-13: NPL of Commercial Banks in China—2006~2009
Item Year SOCBs JSCBs
Source: China Banking Regulatory Commission, Statistics, http://www.cbrc.gov.cn/english/info/statistics/index_
more.jsp
Through securitization of NPL and then sell to AMCs, the amount and ratio of NPL of SOCBs has decreased sharply since 2007, and because of their large assets
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market share in China,15
SOCBs’ amazing scale and market share in banking sector make NPL problems of them could easily affect the soundness of financial system in China; therefore, the study would also like to examine NPL ratio of each SOCB during the same period.
dropping NPL of them also caused total NPL of China banking sector to decrease drastically year on year (Figure 2-8).
Source: China Banking Regulatory Commission, Statistics, http://www.cbrc.gov.cn/english/info/st atistics/index_more.jsp
Figure 2-8: NPL Ratio of Commercial Banks in China—2006~2009
We can see from Table 2-14, from 2006 to 2009 NPL ratio of ICBC dropped from 3.79% to 1.54%, for CCB the ratio dropped from 3.29% to 1.50%, for ABC the ratio dropped from 23.30% to 2.91%, for BOC the ratio dropped from 4.25% to 1.55%, and the ratio of BOCOM dropped from 2.54% to 1.36%.
In year 2006 and 2007 only ABC had double digits of NPL ratio, which showed that ABC had very bad loans quality comparing to other SOCBs, but began in 2008 the figure dropped significantly in order to prepare for transformation into joint-stock company and furthermore to be listed in the future.
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Source: Bankscope, http://bankscope.bvdep.com/ip; BOCOM, Annual Report, 2009.
Because BOCOM has the longest history to cooperate with strategic investor-HSBC Bank,16
Despite NPL ratio can demonstrates assets quality of a bank, we should also pay attention to coverage ratio,
which has given a lot of support and assistance regarding management and business operations, hence NPL ratio of BOCOM remained the lowest every year from 2006 to 2009.
17
On July 17th of 2009, in a meeting of economic and financial sector development, the Chairman of CBRC, Mr. Liu Ming-Kang, said that banks should improve their risk management and raise their average provision coverage ratio to exceed 150% by the end of 2009.
because coverage ratio reflects the ability of a bank to undertake risk of default, it is calculated as the percentage of NPL covered by loan loss reserve. In market practice, coverage ratio should always be larger or equal to 100%, but in order to enhance China bank’s ability to fight against credit risk, CBRC has gradually raise the level of provision coverage ratio from 100% to 130% and then up to 150%.
16 Since August of 2004, HSBC became one of the top ten shareholders of BOCOM.
17 Coverage ratio= loan loss reserve / impaired loans.
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Table 2-15 shows that coverage ratios of all SOCBs in 2006 were smaller than 100% that means none of them can fully undertake risk of default; however, since 2007 coverage ratio of ICBC, CCB and BOC were up beyond 100% except ABC and BOCOM, in 2008 coverage ratio of ABC even fell from 93.42% to 63.53% while BOCOM rose to 117.10%.
By the end of 2009, with over 150% of coverage ratio, ICBC, CCB and BOCOM has met the requirement of CBRC, and coverage ratio of BOC was very close to provision ratio, as to the ratio of ABC, which was the lowest among SOCBs slightly over 100%.
Table 2-15: Coverage Ratio of SOCBs in China—2006~2009
Unit: % Bank
Year ICBC CCB BOC ABC BOCOM
2006
70.56 82.24 91.34 5.10 72.832007
103.50 104.41 106.37 93.42 95.462008
130.15 131.57 117.18 63.53 117.102009
164.41 175.77 148.61 105.37 151.05Source: Bankscope, http://bankscope.bvdep.com/ip; BOCOM, Annual Report, 2009.
Although descending NPL ratios and rising coverage ratios of SOCBs for past four years shows that government’s policies on controlling NPL problems and improving risk management of commercial banks in China are effective, the growing economy will accompany with growing outstanding balance of loans, we still need to pay attention to changes of assets quality of China banking industry in the future.