Bank's rise in bad loans heightens debt concerns

PUBLISHED : Saturday, 07 January, 2012, 12:00am
UPDATED : Saturday, 07 January, 2012, 12:00am


Bad loans spiked at Shanghai Pudong Development Bank, signalling what some analysts say may be the start of a credit-deterioration cycle among mainland banks.

While the non-performing-loan (NPL) ratio - or bad loans as a share of total loans - dropped 7 basis points to 0.44 per cent, the value of the Shanghai-based bank's outstanding bad loans rose 13.2 per cent in the fourth quarter to 5.86 billion yuan (HK$7.19 billion), according to mainland news outlet Caixin.

Sheng Nan, a senior analyst at CCB International, predicted that mainland banks could see a gradual rise in bad loans in future reports and that low deposit values could constrain further lending.

Sectors that pose a risk to credit quality include loans extended to financing vehicles set up by local authorities to fund infrastructure construction, loans handed out to property developers and small and medium-sized companies that were pinched by a liquidity squeeze in the second half of last year.

However, many analysts do not expect NPL ratios to jump significantly among Chinese lenders as they expect the banks to simply make pre-emptive debt restructurings.

'There is enough accounting leeway to keep reported NPL ratios at controlled levels this year,' said James Antos, a senior analyst at Mizuho Securities.

That does not mean investors should place their money in mainland banks stocks.

'For the past few months, I've been hearing nothing but investors saying they don't trust the figures coming out of the Chinese banks,' he said. 'Just based on the amount of scepticism, bank stocks are unlikely to perform well this year.'

There is no political will to risk a credit crisis by increasing reporting on bad loans, said Stanley Li, a banking analyst at Mirae Asset Securities. 'Disclosing the percentage increase in bad loans is as much of a political issue as a business issue,' he said.

Most Chinese banks report their annual results in March. Analysts said Chinese banks have not experienced a credit downturn since the government decided to clean up the bad debts a decade ago.

After an 18 trillion yuan lending binge in 2009 and 2010, outstanding bad loans are expected to rise over the next few years.

Even though Beijing said it has cleaned up about 40 per cent of problems with local government debt amassed in 2010, economists say China's fundamental debt problems have not been addressed and could pose fiscal risks in the long run.

530m yuan

Value, in yuan, of local government debt found to have irregularities in 2010, the National Audit Office said in a report released this week