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27/09/2019 15:39

{I-bank focus}Forcing banks to release provisions insensible

[ET Net News Agency, 27 September 2019] Citi Research said Ministry of Finance (MOF)
yesterday circulated new draft rules for financial enterprises, regulating FI's (financial
institution (FI) excessive provisioning to prevent earnings manipulation and facilitate
more factual representation of operational results.
MOF also deemed banks with NPL (non-performing loans) coverage ratio exceeding 2x
minimum regulatory requirement of 150% as intentionally understating profits to pay less
tax (tax rate is only 15.8% in 1H 2019) and dividend, and demanded they release excess
provisions before year-end.
This has led to market expectations for a potential earnings boost for banks in 4Q. Citi
believes Chinese banks enjoy a low tax rate because they have allocated more assets to
tax-free local government & treasury bonds, and tax-deductible provision is capped at 1%
of loans, so counter-cyclical provisioning mainly aims to smooth out earnings growth.
Citi believes the key intention for MOF proposing this rule is to boost banks' dividend
payments, in turn boosting MOF's income. However, the rule also means the banks'
provisioning will become more cyclical in nature, which runs contrary to CBIRC's policy
direction to push banks to adopt countercyclical provisioning.
Citi said it doesn't make much sense to force banks to release provisions during the
current challenging macro backdrop as that could increase their vulnerability to any
potential credit cycle. (KL)

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