CHINA’S biggest banks are having second thoughts about offloading their bad debts to the asset management companies the government has designated to handle them, in a sign of growing confidence in their own ability to deal with soured loans.

    Bank of China and Industrial and Commercial Bank of China (ICBC) have each discussed plans to use internal resources to recover nonperforming loans, betting that they can generate higher returns than they would get by selling to the asset management companies.

    A greater determination to deal with bad debt is a positive sign for the government, which has been pushing its State-owned banks to get better at assessing and managing risk, and for bank shareholders.

    The strategy, however, will require banks to hold on to bad assets for longer, meaning that China’s lenders may be postponing the clean-up of their balance sheets in the pursuit of higher returns.

    Bank of China’s chairman Tian Guoli said at an analyst briefing in March that the bank will utilize its investment banking subsidiary to dispose of distressed assets, according to banking analyst Liao Qiang at Standard & Poor’s, who attended the briefing.

    ICBC management also said the bank aimed to recover 50-60 cents on the dollar by dealing with bad loans itself, much higher than the 20-30 cents it currently gets from selling them to the asset management companies, said May Yan, head of Chinese banks research at Barclays.

    China established four asset management companies in 1999 in a restructuring of its four biggest banks. The companies were given the mandate to buy nonperforming loans, freeing up the lenders’ balance sheets and hoping to make a profit from the recovery.

    Last year, Chinese banks sold about 70 billion yuan (US$11.2 billion) in bad loans to asset management firms, according to data from Haitong International, more than tripling from 20 billion yuan in 2012.

    Analysts expect the momentum to continue this year as nonperforming loans continue to rise, the result of slower economic growth and a lending binge since 2008. (SD-Agencies)