Bad loans rise at Chinese banks

Non-performing loans at mainland lenders rise for a third quarter, by 4.15pc, as growing number of struggling firms default in 'biggest financial risk' to economy

PUBLISHED : Thursday, 16 August, 2012, 12:00am
UPDATED : Thursday, 16 August, 2012, 3:54am

The level of bad loans in mainland banks rose in the April-June period, marking the third straight quarter of increases for the first time in eight years - and signs point to more sour debt ahead.

Total non-performing loans (NPLs) rose by 18.2 billion yuan (HK$22.3 billion), or 4.15 per cent, to 456.4 billion yuan in the quarter ended June from the preceding quarter, according to data issued by the China Banking Regulatory Commission (CBRC) yesterday.

The average NPL ratio, or the percentage of bad loans to total outstanding loans, was unchanged from the first quarter ended March at 0.9 per cent. Joint-stock lenders, rural banks and foreign banks all reported higher ratios than in the previous quarter, but the ratio was steady or decreased at big state-controlled banks and city commercial banks.

Rising bad loans, resulting from anticipated increasing defaults by companies struggling in a weaker economy, is the "biggest financial risk" faced by the world's second-largest economy, according to a front page commentary yesterday in the central bank's Financial News.

The Shanghai Composite Index fell 1.1 per cent yesterday after several banks said in their interim reports that their bad loans balance increased over the first half of this year.

"The rising bad loans is the result of the lending binge to local government financial vehicles in 2009 and 2010 when lenders were asked to support the nation's four trillion yuan stimulus package," said He Jun, an analyst at consulting firm Anbound. "Asset quality control will become more difficult as banks once again are asked to lend help when local governments are looking for funding for their investment projects."

The deterioration of bank asset quality is widely expected as many of the loans advanced to local government construction projects in the last round of stimulus started to expire from late last year. A considerable portion of the loans are insufficiently covered by the cash flows from the projects they fund, according to the banking regulator.

Adding to banks' woes is the decelerating economy. Growth slowed to a three-year-low of 7.6 per cent in the second half of this year, with many companies grappling with slackened demand stemming from the European debt crisis.

In an internal meeting at the end of May, the CBRC singled out sectors including steel, non-ferrous metals and property development, asking banks to pay attention to the "risky areas" for bad loans as they are troubled by sharp profit declines, according to a bank executive.

In the second quarter, bank profits climbed 23 per cent from a year ago to 335.6 billion yuan, according to the banking regulator.

It was a 2.94 per cent improvement from the first three months of this year. The profit growth was a sharp deceleration from the nearly 40 per cent surge in net earnings of mainland commercial banks last year from 2010.

Banks' assets expanded 20 per cent from a year ago to 126.78 trillion yuan at the end of June.

The weighted average capital adequacy ratio (CAR) climbed to 12.9 per cent as at the end of June, up from 12.7 per cent in the first quarter. The CBRC requires major lenders to maintain a minimum CAR of 11.5 per cent. Other banks need a minimum CAR of 10.5 per cent.