China’s biggest bank warns bad loans will destroy weaker rivals

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By FT

The head of China’s biggest bank has warned that bad loans will inevitably rise and weaker lenders will be wiped out as the government relaxes its grip on the economy.

But Jiang Jianqing, chairman of Industrial and Commercial Bank of China, the country’s largest lender by assets, hit back at foreign critics who have raised questions about the resilience of China’s banks after the lending spree that powered the country through the 2008 global financial crisis. ICBC was prepared for the challenges and should not be held to impossibly high standards, he said.

“You shouldn’t place such high demands on other people’s children,” he said. “You should look after your own children.”

Mr Jiang told the Financial Times in an unusually blunt interview that the bank’s non-performing loan ratio of 0.91 per cent was “excessively good” and was bound to increase as ICBC extended more credit to riskier borrowers such as small companies and households.

Bad loans have started to rise for the Chinese banking sector. They rose by the largest amount in eight years in the third quarter, though as a proportion of industry-wide loans they are still at less than 1 per cent.

“Look at other major international banks. Their [bad loan ratios] are 1 per cent, 2 per cent or higher, but no one requires more of them. For China, the expectations are too high,” said Mr Jiang, who has led ICBC since 2000. “The world seems to think that Chinese banks have to keep their bad loan ratio at less than 1 per cent and that we have to keep lowering it year after year. Can we really cut it to zero? That’s not economically possible,” he said.

Mr Jiang said the risks of loans to the property sector and local governmentwere under control. He said the bigger problem for asset quality was a shift away from lending to big state-backed companies to smaller private groups, a transition the government has encouraged. These loans are “high return and high risk”, he said.

He added that an accelerated pace of interest rate deregulation posed another challenge, squeezing the margins banks traditionally enjoy. With the government also vowing to let failing banks go under, Mr Jiang said lenders would no longer be able to count on state support.

ICBC reservesare 269 per cent of its level of bad loans, nearly double the regulatory minimum.

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