China Economy

Bad loans swell as China economy slows

Overdue debts increase for sixth consecutive quarter, raising concern over default risks

PUBLISHED : Thursday, 16 May, 2013, 12:00am
UPDATED : Thursday, 16 May, 2013, 3:53am


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Soured loans at mainland commercial banks grew for a sixth consecutive quarter in the January-March period, with bad credits expected to keep rising as the economy slows.

Loans overdue at least three months grew 6.8 per cent to 526.5 billion yuan (HK$665.2 billion) in the first quarter, with the non-performing loan ratio climbing to 0.96 per cent at the end of March from 0.95 per cent last year, the China Banking Regulatory Commission said yesterday.

While the mainland's economic growth slowed to 7.7 per cent in the first quarter, banks are faced with mounting default risks in relation to loans to exporters, local government financing vehicles, real estate developers and industries that are saddled with overcapacity problems such as steel makers and cement producers.

"The asset quality of mainland banks has been showing worrying signs since last year amid the economic slowdown, especially joint-stock lenders," said Raymond Yung, a financial services leader at PwC China. "Bad loans are expected to rise further as many banks turn to more risky areas by lending to small and micro companies for higher profits."

Moves towards interest rate deregulation have forced banks away from reliance on profits from lending to large companies.

In the first quarter, banks made 368.8 billion yuan in net profit, up 13 per cent from a year ago, the banking regulator said.

May Yan, an analyst at Barclays Capital, expects Hong Kong-listed mainland banks to post a 12 per cent rise in net earnings this year.

"However, if the mainland's [gross domestic product] growth slows to 7 to 7.5 per cent, profit growth could be in the low single-digit," Yan said.

The ongoing management transition at several banks was expected to trigger a one-off rise in non-performing loans, based on past experience, she said.

Chairman, president or vice-president changes involve banks including Industrial and Commercial Bank of China, Bank of China, Bank of Communications, China Merchants Bank and China Citic Bank, as Beijing reshuffles the financial sector.

"Higher NPL levels could trigger higher credit costs or write-offs, which may cause a decline in dividend payout and lower banks' capital levels," Yan said.

The capital adequacy ratio - which measure a bank's capital to its risk-weighted assets - of commercial banks stood at 12.28 per cent at the end of March, with their assets expanding 17 per cent year on year, the CBRC said.

Large banks are required to have a minimum ratio of at least 11.5 per cent, with 10.5 per cent for other lenders.