Two of the three Chinese government controlled banks operating in New Zealand have disclosed a combined $20.1 million provision stemming from $66 million worth of loans to beleaguered insurer CBL Corporation.
December quarter general disclosure statements from ICBC NZ and Bank of China NZ show the depth of concern over the CBL loans, with the two banks' respective auditors passing comment, and ICBC flagging a potential regulatory capital breach.
ICBC disclosures $32.8 million of lending to CBL as of December 31, and a specific provision of $10.2 million. Bank of China disclosures a €19.50 million, or $33.02 million, loan with a specific provision of $9.9 million raised against the loan.
In its report Bank of China's auditor, EY, comments on the loan under an 'emphasis of matter - specific loan provision' headline.
"There is a high degree of judgment and uncertainty involved in this provision and the loss ultimately suffered by the Bank may be significantly greater or less than the amount provided. Our opinion is not modified in respect of this matter," EY says.
KPMG, ICBC's auditor, under the headline 'emphasis of matter - regulatory compliance,' notes the bank's management plans to rectify any breach in ICBC's regulatory capital buffer ratio, including the lodging of a capital plan with the Reserve Bank and the support of its Chinese behemoth parent bank.
"Our opinion is not modified in respect of this matter," KPMG says.
ICBC itself notes its buffer ratio, required to be a minimum of 2.5%, was 3.3% at December 31.
"Considering the uncertainty in determining the provision, the buffer ratio remains at risk of deterioration from any future adverse movements in the provision and may result in the buffer ratio going below the minimum buffer ratio requirement of 2.50%. The Bank is closely monitoring the buffer ratio and is preparing a capital funding plan for submission to the RBNZ, in the event additional provisioning is required against the loan. This includes a range of alternatives including booking exposures to a related party balance sheet and receipt of further capital from the Parent," ICBC NZ says.
The $32.824 million impaired loan is the sum total of ICBC NZ's individually impaired assets as of December 31, 2017. That compares to no entry in the individually impaired asset column at September 30 last year. Bank of China disclosed $33.028 million of individually impaired assets at December 31, effectively its CBL loan, also compared to none at September 30.
The third Chinese bank operating in NZ, China Construction Bank, reported no individually impaired assets at December 31. The three banks started operating in NZ in 2013-2014.
Meanwhile, the ICBC NZ and Bank of China NZ loans to CBL are both relatively new. CBL's interim report shows that, as of June 30 last year, its only bank loans were a $49.695 million one with ANZ, and a second ANZ loan of €78.048 million.
ICBC NZ's general manager and CEO, Karen Hou, declined to answer a series of questions from interest.co.nz about the CBL loan. And all a spokeswoman for the Bank of China NZ would say was; "The impaired loan identified in our disclosure statement for the year ended 31 December 2017 is the first sizeable impaired loan the bank has experienced in New Zealand. Bank of China (New Zealand) Ltd remains in a strong position to support the growth of New Zealand businesses."
CBL's administrators, Brendon Gibson and Neale Jackson of KordaMentha, are due to call a creditors' watershed meeting by May 11, with the meeting to be held no later than May 18.
*This article was first published in our email for paying subscribers last week. See here for more details and how to subscribe.