Bank Listing Gives Glimpse of China’s Rising Bad Debt Bank of Jiangsu’s prospectus portrays a regional lender grappling with China’s economic slowdown
Shanghai World Financial Center (R) and Jin Mao Tower are obscured by clouds over Shanghai’s financial district in May. Analysts say the real number of bad loans in the banking system is higher than the reported average. Photo: Reuters
By Chuin-Wei Yap
July 3, 2015 8:25 a.m. ET
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BEIJING—An impending listing for the Bank of Jiangsu Ltd., the first in eight years for a midsize Chinese lender, is providing a look into the rising level of bad debt in the country’s banking system.
The bank’s 528-page prospectus filed with the China Securities Regulatory Commission, approved this week, portrays the regional lender grappling with China’s economic slowdown, writing off loans to makers of pipes and construction materials.
In its prospectus, the Bank of Jiangsu said its nonperforming loan ratio—which measures bad debt as a percentage of total loans—was 1.3% last year, higher than the average of 1.26% among China’s five largest lenders. While such levels are regarded as low compared with the rest of the world, analysts said the true portion of nonperforming loans, or NPLs, is larger and the Bank of Jiangsu and other banks acknowledge that the rate of increase is high.
“The economy hasn’t been doing that well in the past few years especially for the sectors that the bank is involved in,” said Ivan Shi, analyst for Shanghai-based financial consultancy Z-Ben Advisors. “The more worrying issue is the continued growth of NPLs over the past few years.”
The Bank of Jiangsu said its bad debt ratio rose 13% in 2014 from 2013, after posting a 14% increase the preceding year. The prospectus said bad debt also rose sharply among 16 other large- and midsize lenders over the past two years. The highest increase was China Industrial Bank Ltd.’s 44.7%.
Rising levels of bad debt have compounded worries among economists and officials over the extent of China’s corporate indebtedness, dragging an already-slowing economy as lending spigots dry up.
Some of the acceleration likely stemmed from banks growing more cautious, calling in loans to otherwise creditworthy borrowers, said Dragon Tang, associate professor of finance at the University of Hong Kong. “The real number (of bad loans) could be even higher, depending on whether they’re doing things like extending loan maturities or evergreening the loan,” Mr. Tang said. Such measures can disguise the volume of bad loans.
The acceleration in bad loans was sharper for China’s largest lenders, which are dealing with the brunt of state-owned corporate debt. For Bank of China Ltd., for example, bad debt rose from 1% of total loans in 2013 to 23% last year.
Data for 2015 weren’t immediately available, though a projection from Industrial and Commercial Bank of China Ltd. indicates that its ratio is likely to keep rising to 1.45% this year from 1.13% last year.
Analysts said the Bank of Jiangsu’s bid to list in Shanghai will likely test the market’s appetite for a raft of similarly debt-laden peers waiting in the wings to be listed. Jiangsu is the first regional bank to test the waters for public offerings since a hiatus begun after massive volatility stemming from the 2008 global financial crisis hit three such lenders that had listed in 2007.
The Bank of Jiangsu sought to reassure investors on measures it has taken to heighten scrutiny of loans. “In recent years, our bank has been continually increasing the intensity of write-offs, and accelerating the handling of nonperforming loans,” its prospectus said.
In large part, the Bank of Jiangsu’s climbing bad loans reflects its position in the Yangtze River delta, the heart of China’s once-vibrant manufacturing hub, much of it privately-held. Jiangsu is home to a large steel sector including China’s largest closely-held steel mill. Steel companies are among the most indebted in China, collectively holding about 1.3 trillion yuan ($210 billion) in bank loans.
Write to Chuin-Wei Yap at chuin-wei.yap@wsj.com
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