Rising bad loans expose policy flaws, Fitch says

PUBLISHED : Tuesday, 07 September, 2004, 12:00am
UPDATED : Tuesday, 07 September, 2004, 12:00am

Policy brakes applied to bank lending in the mainland have achieved only modest results so far, Fitch Ratings said yesterday.

As the mainland's economy slows, forcing debt defaults higher, the banking system will need more capital to meet rising bad-debt charges.

In a report released yesterday on mainland banks' asset quality and capital adequacy, Fitch said official claims that the clampdown on credit was already showing results might be premature.

'It has been widely reported that the government's efforts are being successful and [loan] growth has slowed in the second quarter, with year-on-year loan growth falling to 13.9 per cent in June, from 24 per cent in August [last year],' it said.

But these headline numbers might be misleading, in light of the large write-offs and sales of non-performing loans (NPLs) at the Bank of China and China Construction Bank, it added.

'If these are taken into account, we estimate that the adjusted underlying growth rate showed a more modest slowdown to 17.6 per cent in June,' it said.

Similar caution was expressed earlier this month in a review of the interim results of the mainland's six listed banks by JP Morgan.

Robust profit reported by the banks was driven by credit growth in the first half of the year that ranged from 20 per cent to 50 per cent, JP Morgan said. But NPLs were also on the march, as economic policy measures began to affect the ability of borrowers to repay their loans.

'We are starting to witness signs of deteriorating credit books at some of the banks as a result of the government's tightening measures. Non-performing loans increased by 28 per cent at Shenzhen Development Bank, 8 per cent at Minsheng, and 5 per cent at Huaxia in first-half 2004 versus first-half 2003,' it said.

Fitch said yesterday the declining trend in NPLs reported by mainland banks to the end of last year was helped by a booming economy, plentiful liquidity and rising asset prices. But this was now due to change.

'The anticipated slowdown in the economy after a period of overinvestment [in some sectors] and excessive credit growth is almost certain to give rise to new NPLs, which the banks' thin capital base may not be adequate to absorb,' it said.

The banking regulator on the mainland had adopted capital adequacy as one of the key tools of prudential supervision and now required banks to include capital planning in their plans for loan growth, it said.

'In practice, this requirement is likely to accelerate moves to raise capital from existing shareholders, to seek IPOs or overseas listings, to take on strategic investors and issue subordinated debt to build previously all but non-existent tier 2 capital.'