Banking & Finance

For Chinese companies handling bad loans of banks, 2016 may become best year yet

Number of firms handling bad debt of banks seen up to 31 from 18

PUBLISHED : Wednesday, 23 December, 2015, 6:04pm
UPDATED : Wednesday, 23 December, 2015, 6:04pm

KPMG predicts 2016 may be the best year for China distressed bank assets yet, with the number of asset management companies that specialise in digesting banks’ bad debt portfolio likely to surge up to 31, up from the present number of 18.

But the window for investment may not remain open for long. The year 2016 will likely represent a peak for China NPLs, said Barclays China financials analyst Alex Zhou, with the figure likely to moderate from 2017.

In 2015, the Chinese bank industry saw its highest level of non-performing loans since the onset of the global financial crisis. At the end of the third quarter, the total pile amounted to 1.18 trillion yuan, representing 1.59 per cent of banking assets. Under the category of “special mention loans”, the murky classification for loans which mainland banks have been slow to reconcile as actual bad debt on their books, the total figure has also reached 2.81 trillion yuan, eating up some 3.7 per cent of banking assets.

To make recovery from the loans, banks have been selling off the dud portfolios to asset management companies for just 30 - 35 cents for ever yuan they have loaned out this year. Pricing has dropped compared to 2014, when they would have got 40 - 50 cents per yuan.

Some banks under pressure to resolve NPL issues even provided financing trusts and third-party asset managers - just to have the assets taken off their hands. It is a short cut in an effort to create an illusion for higher negotiated prices than what they could normally get in the market today their recovery process, said Wilson Pang, partner in charge of NPL advisory at KPMG China.

Daniel Jim, managing director at Tripod Management said: “If you try to buy something at 30 cents on the dollar and trade them back to 60 to 70 cents, it is still a good workout.”

On average, Zhou said AMCs have been making 19 per cent return per year on average. But Pang said the present level of pricing is not representative of the fair value. There are now more sellers than buyers in the market.

With more participants anticipated to be allowed to enter the market next year, there could be a better chance of correcting the market imbalance and allow the assets to achieve better pricing.

Against the rapid NPL expansion, big AMCs led by the likes of Cinda and Huarong have come to a point of saturation, where they have not invested in more resources to keep up. Instead, they have cut down the time they spend on turning around the portfolios - from the previous three to four years cycle to just one year this year. Zhou said more companies are turning themselves into wholesalers.

Pang said:“The folks at the asset management companies have their hands go limp just from buying bad debt portfolio from the big-four, big-five state-owned banks. In city commercial banks’, where loan size average for just a few hundred to a thousand yuan, they could be in a much worse place.”

City commercial banks, the 134 players whose profile are the most vulnerable and the smallest in the industry, have this year ploughed into the IPO market to recapitalize their fragile balance sheets both in the Hong Kong and domestic bourses this year, to investors’ mixed response.

Ling Gan, the director in charge of city commercial banks supervision at the China Banking Regulatory Commission told press last week city banks’ level of dud loans is now only 1.45 per cent, totaling 121.4 billion yuan.

But most analysts in the market believe the figure may be understated, and is not representative of the risk of deterioration in their business profile.

Pang said: “For small banks’ NPL ratio to remain at a level of only 1.45 per cent would imply they have superior client quality and credit management skills comparing even to the industry’s ‘big 5’ state-owned banks.”

City banks had been one of the key forced recipients of the 3.2 trillion yuan worth of low-yielding local government bonds, which swapped them out of the higher yielding loans that local governments had owed, under the fiscal reform carried out by the Ministry of Finance this year.

Finance minister Lou Jiwei told the National People’s Congress Standing Committee on Tuesday the bond swap had helped resolved the local government debt payable for this year. But under slowing land sales and worsening fiscal positions, he warned local government’s ability to repay their debt is worsening.

Local governments have been explicitly forbidden to add new debt to their balance sheet under the central government’s fiscal reform announced in November 2013. But without stable cash flows, more local governments have been making new borrowings masked as equity financing – a rising phenomenon the ministry is struggling to keep check of.

The central government has vowed to lower the nation’s level of leverage as a key focus of its work, along with removing excess capacity in industries beleaguering the nation next year.