First the good news: a cut in regulatory reserves to boost rural lending. Handy for an institution named Agricultural Bank of China. But then the bad: AgBank’s own provision for souring debt grew four times as fast as its good loan book last year. If the numbers from China’s third-largest lender are anything to go by, the outlook for the Chinese banking sector is worsening rapidly.
A downturn was to be expected. The combination of a slowing economy and the maturing of 2009’s state-directed lending spree (AgBank’s loan book grew by a full third that year) was never going to be pretty. The bank’s profits in the last quarter of 2011 were Rmb21bn, 25 per cent below expectations and its weakest performance since it listed in 2010. The bank’s loan book grew 13 per cent last year. However, loan impairments rose by three-fifths to 4.1 per cent of the total book.
China’s other big banks report over the next week. Watch those bad loan numbers. The scale of the problem, and how decisively China deals with the dark side of its post-Lehman Brothers credit boom, will be critical to the banks’ future performance. Precedent is not encouraging. Officials mopped up the fallout from its 1990s lending bubble by creating “bad banks” to buy non-performing debt at face value and funded the new institutions by issuing bonds to those same banks. In 2009, those loans were extended for another decade.