Bank of China (BoC), the largest of China’s big four state-owned banks, has announced that its non-performing loans ratio will be down to around 5% by the end of 2004 as it plans to bring in a strategic investor later this year in preparation for its IPO. This significant reform of the bank’s ownership structure reflects the Chinese authorities’ determination to reform the big four banks which account for 55% of China’s bank assets.
Speaking at the recent Asian Development Bank annual meeting in South Korea, Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), said: “The ultimate success of the reforms lies in diversification of the banks’ ownership and fundamental transformation of their operating mechanisms.” BoC and China Construction Bank have been chosen to carry out reforms on a pilot basis and recently both received massive capital injections.
Du Chaochua, deputy general manager at BoC, explained to The Banker that PricewaterhouseCoopers has been brought in to check the bank’s results and the government has allowed the bank to deduct NPLs through profits. The first major step will be to bring in a strategic partner and restructure the board of directors, but no decision has been made on what percentage the prospective partner will take. Once a new structure is in place, probably later this year, the IPO process will begin but no decisions have been made yet on advisers or where the IPO will be listed.
At present, NPLs at China’s major banks are said officially to be around 18%, but Deborah Schuler from Moody’s believes the figure is closer to 35%. So Bank of China’s assertion of lowering NPLs to around 5% by the end of this year represents a massive shift, if it occurs.
Mr Liu also set out 10 guidelines for better corporate governance and recommended seven benchmarks to measure the progress of reforms at the banks. Along with the desired benchmark that “NPL asset ratio will be controlled within the range of 3%-5%”, Mr Liu stated: “Net RoA [return on assets] ratio will reach 0.6% by 2005, and will be further increased to the level of the best international banks by 2007.”
He added: “Net RoE [return on equity] ratio will reach 11% or above by 2005, and be further increased to 13% or above by 2007.”
