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No end in sight for bad-debt malaise at mainland Chinese banks

Economic slowdown will continue to mount pressure on the asset quality in the sector

PUBLISHED : Monday, 23 December, 2013, 4:47am
UPDATED : Monday, 23 December, 2013, 4:47am

Joey Li, the owner of a micro-credit company in Jiangsu province, says he spent most of his time this month trying to collect debts.

But many of the cable manufacturers, metal producers, textile plants and small hotels he has lent money to over the past two years were closed and deserted, with overdue loans soaring to 140 million yuan (HK$177 million).

When Li began lending money three years ago, he started off with 200 million yuan.

"Among the overdue loans, it is possible to recover only 20 million to 30 million yuan," the 38-year-old said. "In addition to filing lawsuits against the borrowers, what I can do now is to pray for the economy to improve next year."

Economists expect the non-performing loans of mainland banks to continue to grow next year, with economic growth likely to further decelerate amid a slight tightening of monetary policy to contain financial risks.

The lending binge after the 2008 global financial crisis increased leverage in the economy, sent bad loans soaring and added to overcapacity in the steel and cement industries.

"The banking sector will go through a relatively painful period as China reduces its growth target and squeezes its financial bubble," said Peng Wensheng, an economist with China International Capital Corp.

A broad economic slowdown and weak external demand have seen overdue debts stack up on banks' loan books. That has forced them to repeatedly roll over bad debt, starving them of fresh capital to make new loans to more profitable businesses.

Average profits of the l6 listed mainland banks were likely to grow 9.4 per cent next year, a significant slowdown from the nearly 15 per cent increase in the first three quarters of this year, said analysts at China Merchants Securities in Shenzhen.

"Banks' asset quality will continue to feel pressure next year, with both NPL balance and ratio expected to rise slightly," said Luo Yi, an analyst at the brokerage. "But there's no need to be too pessimistic because [Beijing] will gradually solve the local debt problem instead of letting it evolve into a crisis."

The liabilities of local governments are likely to have doubled to more than 20 trillion yuan since 2010, including 9.7 trillion to 9.8 trillion yuan of bank loans and 13 trillion to 14 trillion yuan from the shadow banking system, mainly trust firms, as they sought to prop up economic growth, said Liu Yuhui, a researcher at the Chinese Academy of Social Sciences.

To postpone having to deal with their bad debts, banks have been rolling over loans to local government financing vehicles.

The central government planned to introduce municipal bonds, to be sold by local governments, and allow banks to sell securities backed by loans of such vehicles to improve liquidity, said academic sources.

With solid provisions and stable profits to rely on, the bad-loan problem was unlikely to develop into a crisis next year, analysts said. But they are not optimistic about the medium to long term.

James Antos, an analyst at Mizuho Securities, said: "Assuming only a moderate slowdown of the economy over the next three years, we expect NPLs to treble by the end of 2016."

NPLs at banks increased for an eighth quarter to 563.6 billion yuan in the third quarter of this year, with the ratio rising from 0.96 per cent in the second quarter to 0.97 per cent, said the China Banking Regulatory Commission.

"Loans past due less than 30 days surged this year, particularly for banks focusing on loans to small businesses," Antos said.

Bankers are shifting focus to serve smaller companies because large corporate clients have lower-cost funding alternatives, including the issue of corporate bonds.

"Margin pressure has prompted the banks to focus on higher-risk loan segments, such as mid-sized and small borrowers," Moody's Investors Service analysts said in a research report. "From a credit perspective, even if the banks can maintain their net interest margin [a measure of lending profitability], their risk-adjusted spread and profitability could still be under threat from potentially higher credit costs as a result of their portfolio shifts."

The ratings agency said the outlook for the mainland's banking system was stable for the next 12 to 18 months as the authorities stayed on a path of steady expansion and pursued an agenda of orderly reform. But lenders' asset quality would come under pressure.



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