It's becoming more difficult to pay down China's $470 billion debt pile. China Bohai Bank just announced that it is selling $4 billion worth of non-performing assets. It highlights the pressure that lenders are experiencing as the nation's real estate bubble bursts. However, purchasers are also under the pressure.
Based in the northern city of Tianjin, Bohai Bank has been severely impacted by the slowing economic growth and real estate market. Being one of the most indebted regions in China, the area has struggled with excess capacity in manufacturing sectors and declining real estate values, which were previously a major source of income for local governments. Bohai Bank's loan book, which was worth 932 billion yuan last year, was primarily located in China's northern and northeastern regions, where its profit before taxes fell to 1.7 billion yuan from 5.5 billion yuan in 2021. During the same time frame, its Hong Kong-listed stock has decreased by 80%.
Non-performing loans (NPLs) at the $2 billion lender totaled 16.5 billion yuan as of December, accounting for 1.8% of gross loans. Yet problem loans accounted for over 5% of total debt when combined with special-mention loans, which are marginally less risky than NPLs. The principle, interest, and other components of the 29 billion yuan assets that Bohai Bank intends to sell will be discounted by up to 40%. More than 75% of the bank's projected net profit for 2023 will be lost, amounting to 3.8 billion yuan.
The sale is substantial: even though the assets represent less than 2% of the bank's total assets, they are 54% larger than the non-performing assets it sold in 2023. It seems like the seller is also getting a better offer. According to Bohai Bank, the average principle haircut for comparable transactions in Tianjin for the previous three years was 71.7%.
The deal occurs at an awkward moment for asset management firms, sometimes referred to as "bad banks." China established the Big Four in 1998 to take over the nation's four biggest lenders' bad debts.
However, following years of explosive growth, their profitability, capital structure, and balance sheets are all in jeopardy. Cinda known as the strongest of the four and also one of the bidders for the assets of Bohai Bank, issued a warning last month that its first-half profitability could decline by as much as 50% compared to the same period last year. The country's banks hold $1.1 trillion in special-mention and non-performing loans, according to government data, an increase of 29% since the end of 2019.
This implies that buyers will be driving a harsher bargain, which will make transactions like Bohai Bank's more difficult to complete.