Bank of China, China's second-biggest lenders by assets, set aside more than 200 billion yuan (US$17.5 billion) in shareholders' equity to gradually write off bad loans, said bank spokesman Miao Saiwang, confirming a report by state-owned Xinhua News Agency.
The Beijing-based lender, given a US$22.5 billion government bailout last month, needs to cut its bad-loan ratio to below 15 percent to conduct a domestic share sale and 10 percent to sell stock overseas to meet regulatory requirements. Its non-performing loans reached 343.8 billion yuan at the end of December, or 15.92 percent of its total lending.
China's four state-run lenders have been trying to reduce bad loans estimated at close to a fifth of total lending, the legacy of five decades of government-directed lending to unprofitable state enterprises.
"The reason Bank of China will write off bad loans only gradually is because doing it all in one go would encourage all delinquent borrowers to seek write-offs," said Wei Yen, senior credit officer at Moody's Asia Pacific Ltd. "The bank wants to monitor progress of new loans, to make sure they don't simply repeat the process of new loans going bad."
Bank of China, which plans to sell shares next year, and China Construction Bank received a US$45 billion bailout from the government, which used about a tenth of the country's foreign-exchange reserves to help the lenders beef up their ratio of capital to risk-weighted assets.
China's state-run lenders will be exposed to head-to-head competition from foreign banks such as HSBC Holdings Plc and Citigroup Inc. when the industry opens up in 2006.
The Ministry of Finance supports moves by Bank of China and China Construction to use their combined $300 billion in shareholders' equity to cut bad loans, Finance Minister Lou Jiwei was cited as saying by state-owned Economic Daily earlier this month.