The asset quality of mainland lenders will still be the focus of attention in the first-quarter results season this month, after full-year results for 2011 raised red flags.
Earnings for Hong Kong-listed mainland banks turned out better than expected in the last quarter of 2011 on the back of improved lending profitability and lower costs, analysts said. But since the third quarter, the banks have begun showing a trend in rising bad debts.
Jiang Jianqing, chairman of Industrial and Commercial Bank of China (ICBC), however, last week reiterated that mainland lenders were in good health. They could be coughing a bit, but they were far from sick, Jiang said.
He also said banks could only be diagnosed sick after non-performing loan (NPL) ratios rise in several consecutive quarters.
NPL balances for the seven biggest among the nine mainland lenders listed in Hong Kong rose 3 per cent quarter on quarter in the fourth quarter, the first sequential increase since the fourth quarter of 2008, said Michael Werner, a senior analyst at Sanford C. Bernstein.
The average NPL ratio of the seven larger banks remained flat quarter on quarter at 0.91 per cent. But this was also the first time their average NPL ratio ceased to show sequential declines since the fourth quarter of 2008, he added.
Many banks posted rises in both NPL ratios and balances, though mildly. Sheng Nan, a senior analyst at CCB International, said it would be better to focus on changes in overdue loan balances, as there was a degree of subjectivity in recording NPL.
Loans overdue by more than a year dropped, but this was offset by a rise in loans overdue in a year among Hong Kong-listed mainland banks, indicating that while the ability of lenders to collect loans was still strong, borrowers encountered more operating difficulties, said Sheng.
Most banks saw a rise in their balances of special-mention loans - potentially weak loans or assets presenting an unwarranted credit risk but less risky than substandard assets. Such loans indicate borrowers could face problems in loan repayment if adversely affected by certain factors. Special-mention loans rose by 45 billion yuan in the second half, the steepest rise since the first half of 2009, said Sanford C. Berstein.
Most of this increase was driven by Bank of China, which reported a 44 billion yuan (HK$54 billion) rise. China CITIC bank's special-mention loans also jumped 74 per cent from the first half.
Credit costs could also rise this year, despite banks saying that the costs would be similar to those in 2011, analysts said.
Banks have been reporting rises in this area, with fourth-quarter credit costs coming at 20 basis points higher than the average of the first three quarters, said Sanford C. Bernstein, which forecasts that credit costs will rise to 0.80 to 0.85 per cent this year and jump to 1.05 per cent in 2013.
Agricultural Bank of China reported the highest annualised credit costs in the fourth quarter, at 1.64 per cent, up 59 basis points over the average of the first three quarters, requiring the highest quarterly provisioning since it started to be publicly traded.