Lenders brace for surge in bad loans

After a sharp increase in bad loans in the third quarter, analysts warn of worse to come amid worries over banks' asset quality

PUBLISHED : Friday, 01 November, 2013, 3:23am
UPDATED : Friday, 01 November, 2013, 3:23am

Bad loans are expected to rise further at mainland banks in the coming months after a sharp increase in the third quarter hit lenders' profitability.

The nine Hong Kong-listed mainland banks reported an average increase in non-performing loans (NPLs) of 45.5 billion yuan (HK$57.8 billion) in the quarter, 4.2 per cent more than the previous quarter, according to their financial reports released this week.

Among them, the Big Four - Industrial and Commercial Bank of China (ICBC), China Construction Bank, Agricultural Bank of China and Bank of China - posted the largest increase in NPLs in at least three years, with soured loans up 3.5 per cent to a combined 329.4 billion yuan.

"Although reported NPL ratios were largely steady, the high gross NPL formation continued," said Barclays Capital analyst May Yan. "Going forward, NPLs will rise at a measured pace, with banks accelerating write-offs and packaging NPL disposals."

The average NPL ratio of the nine listed lenders climbed 0.01 percentage point to 0.92 per cent over the quarter. However, the real asset-quality situation was more severe than the NPL ratio suggested, analysts said.

For example, ICBC, the world's largest and most profitable lender, reported NPLs were up 7 per cent from the second quarter.

But Citi analyst Simon Ho said: "We estimate the underlying NPL formation of ICBC, after adding back the estimated write-offs, is 15 per cent quarter on quarter. Despite a high underlying NPL formation, the provision charge looks low."

He added that ICBC's 27-basis-point credit cost was at the low end for the sector.

Asset quality at all mainland banks worsened for seven consecutive quarters up to the end of June, according to the industry regulator, as an economic slowdown set in and the lending binge following the 2007-08 global financial crisis backfired.

Industrial overcapacity, concerns about the solvency of local governments and demand doldrums faced by exporters and small enterprises have generated a massive amount of bad loans. And economists say things may deteriorate, with the mainland's economic expansion possibly slowing to 7.1 per cent next year from a predicted 7.6 per cent this year as the government focuses on reforms.

"The pressure on asset quality is significant," said an executive at a major bank, adding that loans to steel traders, low-end manufacturers, and small and medium-sized wholesalers and retailers were high-risk areas.

The impact has been felt on banks' bottom lines. The Big Four's combined third-quarter profits grew 10.8 per cent year on year to 209 billion yuan, the slowest rise in seven quarters. The combined impairment losses on loans totalled 29 billion yuan.

Bad loans also make it harder for lenders to strengthen their capital base.

"Although lenders' capital adequacy generally improved in the quarter, after rights issues, bond sales and other means to replenish capital, the pressure remains as they expand their loan book and build up soured loans," said an analyst at a Beijing-based investment bank.

Banks were expected to be allowed to issue non-tradeable preferred shares, in a bid to minimise the stock market impact of their capital adequacy problems and explore another avenue to bolster their balance sheets with funding from commercial investors, the securities regulator said in September.

The arrangement is believed to be aimed to avoid a government bailout in the event of a bad-loan crisis.