Monday, May 15, 2006
The E&Y Report is worse than what I had thought. Apparently, the figure mentioned in the report even contradicts with the results of E&Y's own audit of ICBC! This is the worst aspect of this report: E&Y and other accounting firms have pushed the Chinese to adopt the five-category loan classification and to hire them as "independent" auditors of the books. Fine, but then it turns around and accuses the Chinese of falsifying figures. True, that still happens, but to say that the extent of falsification is the same as before is simply ridiculous, and they know it. Fortunately, they are called on their exaggeration this time. See the official retraction below, as well as an excellent FT article on this:
Ernst & Young's statement
Ernst & Young Withdraws NPL Report
Global Headquarters, London, 12 May 2006 The Nonperforming Loan (NPL) Report that was issued on 3 May 2006 reported that the NPL exposure for China was estimated at US$911 billion. Throughout the report this amount was identified as a potential future amount that includes NPLs totaling approximately US$358 billion for the big four commercial banks. Upon further research, Ernst & Young Global finds that this number cannot be supported, and believes it to be factually erroneous.
The NPL Report did not go through our normal internal review and approval process before it was released to the public and, as it contains errors, we are withdrawing the report.
The official level of NPLs of US$133 billion for the big four commercial banks in China is computed on a regulatory and accounting standard based on objective evidence of impairment. Ernst & Young China serves as auditors for one of those four commercial banks and their audit, performed under international standards of auditing in order to form an opinion on the bank’s state of affairs in accordance with International Financial Reporting Standards, supports the bank's contribution to the total of US$133 billion for all four of the commercial banks.
We apologize that this erroneous report was issued. We sincerely regret any misleading views that the report conveyed.
FT
Ernst & Young withdraws China NPL report
By Richard McGregor in Beijing
Ernst & Young, the accountancy firm, has withdrawn a controversial report on China's non-performing loans, saying its estimate of bad debts for the country's big four state banks "cannot be supported" and "is factually erroneous."
The announcement comes days after the report was attacked by the People's Bank of China, the central bank, as "ridiculous and barely understandable" and at odds with the firm's own auditing of Chinese banks.
The main problem for E&Y appears to have been a conflict between the NPL report and its own auditing of the Industrial & Commercial Bank of China, the country's largest lender, ahead of an overseas listing slated for September.
E&Y in its NPL report identified the level of bad debts in the big four state banks, including ICBC, as US$358bn, much larger than the official number of US$133bn.
The additional US$225bn in extra bad debt was derived from a UBS research report estimate of the amount of new sour loans resulting from a surge in lending in China between 2002 and 2004.
In a statement issued with the retraction of its report, E&Y resolved the conflict firmly in favour of its auditors, saying the official figure was "computed on a regulatory and accounting standard based on objective evidence of impairment."
E&Y China serves as auditors for one of those banks and their audit, performed under international standards of auditing in order to form an opinion on the bank's state of affairs in accordance with International Financial Reporting Standards, supports the bank's contribution to the total of US$133bn for all four of the commercial banks,†the statement says.
In a separate statement on Monday, E&Y said the NPL report had erred by treating "unverified forecast data compiled by others as if it were historic information."
E&Y said it was clear that its own internal policies for approving such reports were not followed and procedures would be reviewed to ensure that such an embarrassing situation will not happen again.
The E&Y report on bad debts took many by surprise as the market had become much more relaxed about China's NPL issue after a wave of initiatives to clean up the books of the country's big banks in particular.
The timing of the E&Y report was especially aggravating for the PBoC, coming just before the launch of a roadshow to promote the US$9.9bn initial public offering by Bank of China in Hong Kong, and the preparations for the ICBC listing.
The overseas listings, the first of which was late last year with the IPO of China Construction Bank in Hong Kong, are a central part of the government's plan to transform them into genuine commercial lenders.
E&Y's estimate of China's total NPL liabilities of US$911bn in its report released in early May was nearly double the same firm's 2002 estimate of about US$480bn.
E&Y says it plans to review the original NPL report, issued on May 3 this year, and release a revised version.
Although they did not include the same high numbers as the E&Y report, both PwC, the consultancy firm, and McKinsey Global Institute, have issued reports in recent weeks reaching similar conclusions about mounting levels of new bad loans in the Chinese banking system.
Ernst & Young's statement
Ernst & Young Withdraws NPL Report
Global Headquarters, London, 12 May 2006 The Nonperforming Loan (NPL) Report that was issued on 3 May 2006 reported that the NPL exposure for China was estimated at US$911 billion. Throughout the report this amount was identified as a potential future amount that includes NPLs totaling approximately US$358 billion for the big four commercial banks. Upon further research, Ernst & Young Global finds that this number cannot be supported, and believes it to be factually erroneous.
The NPL Report did not go through our normal internal review and approval process before it was released to the public and, as it contains errors, we are withdrawing the report.
The official level of NPLs of US$133 billion for the big four commercial banks in China is computed on a regulatory and accounting standard based on objective evidence of impairment. Ernst & Young China serves as auditors for one of those four commercial banks and their audit, performed under international standards of auditing in order to form an opinion on the bank’s state of affairs in accordance with International Financial Reporting Standards, supports the bank's contribution to the total of US$133 billion for all four of the commercial banks.
We apologize that this erroneous report was issued. We sincerely regret any misleading views that the report conveyed.
FT
Ernst & Young withdraws China NPL report
By Richard McGregor in Beijing
Ernst & Young, the accountancy firm, has withdrawn a controversial report on China's non-performing loans, saying its estimate of bad debts for the country's big four state banks "cannot be supported" and "is factually erroneous."
The announcement comes days after the report was attacked by the People's Bank of China, the central bank, as "ridiculous and barely understandable" and at odds with the firm's own auditing of Chinese banks.
The main problem for E&Y appears to have been a conflict between the NPL report and its own auditing of the Industrial & Commercial Bank of China, the country's largest lender, ahead of an overseas listing slated for September.
E&Y in its NPL report identified the level of bad debts in the big four state banks, including ICBC, as US$358bn, much larger than the official number of US$133bn.
The additional US$225bn in extra bad debt was derived from a UBS research report estimate of the amount of new sour loans resulting from a surge in lending in China between 2002 and 2004.
In a statement issued with the retraction of its report, E&Y resolved the conflict firmly in favour of its auditors, saying the official figure was "computed on a regulatory and accounting standard based on objective evidence of impairment."
E&Y China serves as auditors for one of those banks and their audit, performed under international standards of auditing in order to form an opinion on the bank's state of affairs in accordance with International Financial Reporting Standards, supports the bank's contribution to the total of US$133bn for all four of the commercial banks,†the statement says.
In a separate statement on Monday, E&Y said the NPL report had erred by treating "unverified forecast data compiled by others as if it were historic information."
E&Y said it was clear that its own internal policies for approving such reports were not followed and procedures would be reviewed to ensure that such an embarrassing situation will not happen again.
The E&Y report on bad debts took many by surprise as the market had become much more relaxed about China's NPL issue after a wave of initiatives to clean up the books of the country's big banks in particular.
The timing of the E&Y report was especially aggravating for the PBoC, coming just before the launch of a roadshow to promote the US$9.9bn initial public offering by Bank of China in Hong Kong, and the preparations for the ICBC listing.
The overseas listings, the first of which was late last year with the IPO of China Construction Bank in Hong Kong, are a central part of the government's plan to transform them into genuine commercial lenders.
E&Y's estimate of China's total NPL liabilities of US$911bn in its report released in early May was nearly double the same firm's 2002 estimate of about US$480bn.
E&Y says it plans to review the original NPL report, issued on May 3 this year, and release a revised version.
Although they did not include the same high numbers as the E&Y report, both PwC, the consultancy firm, and McKinsey Global Institute, have issued reports in recent weeks reaching similar conclusions about mounting levels of new bad loans in the Chinese banking system.
Comments:
"The Economist" (May 20th) thought E&Y caved in too easily to the pressure of the PBOC. The E&Y figure and the official figures differ because E&Y tried to estimate the new NPLs that will result from a lending spree between 2002 and 2004, and the economist thought the estimate was roughly reasonable. What do you make of it? thanks.
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