China banks see bad loans rise for fifth quarter

Mainland banks saw the value of overdue loans rise by 14.1b yuan at the end of 2012, with one analyst warning of further declines in asset quality

PUBLISHED : Saturday, 02 March, 2013, 12:00am
UPDATED : Saturday, 02 March, 2013, 4:17am

Bad loans at mainland banks increased for a fifth straight quarter at the end of last year, and analysts expect a further deterioration in asset quality this year.

Loans overdue at least three months rose by 14.1 billion yuan (HK$17.6 billion) in the fourth quarter of 2012 to 492.9 billion yuan, with the non-performing loan (NPL) ratio unchanged at 0.95 per cent from the previous quarter, the China Banking Regulatory Commission (CBRC) said yesterday.

Defaults increased as the mainland economy expanded 7.8 per cent last year, the slowest pace in 13 years. However, abundant liquidity and credit for corporate borrowers helped prevent the NPL ratio from rising sharply.

Standard & Poor's ratings service analyst, Ryan Tsang, said: "Mainland banks' bad loans could continue to rise this year.

"Banks will remain heavily exposed to lacklustre export growth, debt-laden local government financing platforms and manufacturers afflicted by oversupply."

Most mainland bank shares lost ground yesterday, with Industrial and Commercial Bank of China, the world's largest lender by market capitalisation, slipping 0.95 per cent in Shanghai and 0.9 per cent in Hong Kong.

The precarious financial position of certain corporate segments, from property developers to steelmakers, could pose a significant threat to the balance sheet strength of mainland banks, Tsang said.

Combined net income at mainland banks grew 18.9 per cent last year to 1.24 trillion yuan, according to the CBRC. That was a substantial slowdown from the 36 per cent increase in 2011.

China Merchants Bank, the mainland's sixth-largest lender by assets, said yesterday that its net profit rose 25.3 per cent to 45.27 billion yuan last year.

Net interest margin at the mainland's 3,800 lenders contracted to 2.75 per cent in the fourth quarter from 2.77 per cent in the third, the CBRC said. This performance measure is the difference between interest income and cost of funds, as a ratio of interest-bearing assets.

Analysts expect lenders' profitability to decline further as continuing interest rate deregulation introduces competition in the deposit and loan businesses.

May Yan, an analyst at Barclays Capital, said she expected Hong Kong-listed mainland banks to post year-on-year profit growth of 17 per cent on average, driven mainly by stable net interest margins and steady credit charges. Potential interest rate deregulation could be a risk for lenders' profits in the second half of this year, Yan said.

Banks' capital adequacy ratios strengthened to 13.25 per cent at the end of December from 13.03 per cent in September. The CBRC requires major lenders to maintain a minimum ratio of 11.5 per cent. Other banks need a minimum of 10.5 per cent.

Mainland banks will face pressure to constantly replenish capital this year because of high growth in credit and tightened capital requirements under China's Basel III framework, S&P said in a report this week.

Banks' assets rose 17.9 per cent last year to 133.6 trillion yuan, the CBRC said.

As the sector's accrual of internal capital is insufficient for asset growth, analysts expect lenders' capitalisation to decline modestly this year.