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China faces big bill for banks' clean-up

The recapitalization of the Industrial and Commercial Bank of China (ICBC, 中國工商銀行) and the Agricultural Bank of China (ABC, 中國農業銀行) will cost Beijing at least US$110 billion, a leading bank rating agency said yesterday.

Standard and Poor's Ratings Services said the cost could be as high as US$190 billion "if more conservative loan loss provisions and recapitalization assumptions are made."

The recapitalization costs would be in addition to the recent government injection of US$15 billion into the ICBC.

"For ICBC, [the remainder of the injection] presumably will happen this year and Agricultural Bank of China perhaps later on, perhaps next year or the year after," said Paul Coughlin, Standard and Poor's managing director for Asia.

China is trying to strengthen its banking system before fully opening its financial markets to foreign players at the end of next year in line with its commitments to the WTO.

ICBC this month became the third of the big four state-owned commercial banks to receive a major bail-out from the government.

At the end of 2003, the Bank of China (中國銀行) and the China Construction Bank (中國發展銀行) received US$22.5 billion each to clean up their balance sheets and prepare for hoped for listings.

ABC, considered the bank with the biggest non-performing loan (NPL) problem, is yet to receive a government funding package and is expected to be the last to enter the capital markets.

Standard and Poor's lowest estimate of the extra amount required to bail-out ABC and ICBC is based on minimum loan loss provisions required by regulators and an adequate level of capitalization to support the banks' existing balance sheets.

ICBC would need US$51 billion and ABC some US$57 billion, bringing the total just below the US$110 billion mark.

However, that amount would not be enough to support the banks' rapid growth or to properly absorb potential future losses from their lending activities, the rating agency said in a statement.
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