China Construction Bank's NPL woes finally over

NPL formation receded to less than US$4b in Q1.

NPL formation has receded from Rmb150b (US$22b) in 2016 to about Rmb25b (US$3.7b) in 1Q17, reports UOB Kay Hian. The sequential moderation of new NPLs is a positive trend. SMLs increased marginally by Rmb10b (US$1.5b) or 3% qoq in 1Q17.

"We estimate that SML ratio has improved by 2bp qoq to 2.85%."

Here's more from UOB Kay Hian:

More conservative in stringent classification of NPLs. CCB has conservatively classified loans that are more than 60 days overdue as NPLs, and this is more stringent than regulatory requirement of 90 days. This conservative practice creates an extra buffer for CCB. Provisions are expected to be flat compared with 2016. Management intends to maintain loan-loss coverage slightly above the minimum requirement of 150%.

Managing bad loans internally. Management intends to limit the disposal of NPLs and instead, focus on collection and recovery. CCB has the requisite expertise and manpower. Handling collection and recovery internally would enhance the return from NPLs vs disposal through auctions. Unfortunately, this would reduce the flow of NPLs to independent asset management companies, such as Cinda and Huarong.