POSTAL Savings Bank of China (PSBC), the lender preparing for a share offer that may raise US$8 billion, reported an 11 percent increase in first-quarter profit as it pared back provisions for bad loans.

    Net income was 12.5 billion yuan (US$1.9 billion) in the three months to March 31, prelisting documents filed to Hong Kong’s stock exchange showed. Earnings for 2015 rose 7 percent to 34.9 billion yuan. The lender’s nonperforming loan ratio stood at 0.81 percent as of March 31 — or less than half the official figure for the industry as a whole.

    But a review of PSBC’s 843-page prospectus reveals the bank’s growing exposure to illiquid alternative assets that could pose a risk to its balance sheet.

    Its investment in high-return assets such as wealth management products, trust investment plans, asset management plans and securities investment funds have risen to 12.4 percent of total assets at end-March from just 2.7 percent in 2013, the prospectus shows.

    Regulators in China are concerned that such “shadow lending” products — often financing borrowers that struggle to raise loans, such as firms with high debts and overcapacity or local government agencies — mask the scale and risks of lending in an economy where debt has ballooned since the global financial crisis.

    Such investments typically have more lax provisions for recognizing bad bets than traditional lending and are often structured so as not to appear on the originating bank’s balance sheet. (SD-Agencies)