Chinese banks see worst to come for impaired loans, says survey

PUBLISHED : Friday, 24 February, 2017, 6:52pm
UPDATED : Friday, 24 February, 2017, 6:52pm

The majority of bankers in China believe the worst is yet to come in terms of deteriorating asset quality as the mainland economy faces stronger headwinds, according to an industry survey published on Friday.

About 70 per cent of the bankers said China’s bad loan situation has yet to be fully exposed despite a continuing rise in both the outstanding value and ratio of impaired loans for four straight years, the China Banking Association and PwC said in a joint statement on Friday.

The survey involved responses from about 1,800 bankers in China in the second half of 2016.

About 61 per cent of bankers said they expect the peak season for bad loans exposure to be in one to two years, while 30 per cent said they expect the timeframe to be three to five years.

Meanwhile, 47.2 per cent of bankers surveyed said the debt-to-equity swap programme, a renewed version of the approach the government used in 1999 to spin off bad debts from state-owned banks, won’t help avoid a crisis, only delay the exposure to risks.

The debt-to-equity swap, where debt held by banks in underperforming companies is swapped for stock holdings, was raised by Chinese Premier Li Keqiang in March 2016 to address China’s high levels of debt that were increasingly worrying global investors amid warnings it could trigger a banking crisis.

Chinese banks to issue more bad loan-backed securities in 2017: Fitch

“Asset quality has yet to turn around in China despite signs of improvement in terms of NPL ratio in the fourth quarter,” said Yang Yue, a banking analyst at China Zheshang Bank.

“Securitisation of bad loans and the debt-to-equity swap helped trim bad loans more swiftly for a better reading in the fourth quarter,” he said. “But it doesn’t mean banks stay safe from bad loan risks.”

Banks are keeping alert to worsening quality as they handle existing bad assets while being more stringent in extending new credit, he said.

In terms of dealing with bad loans, collection and write-off is still the dominant approach, with only 10.9 per cent of respondents turning to asset backed securitisation (ABS) and 4.2 per cent having tried the debt-to-equity swap programme.

But 66.6 per cent of bankers said they would choose asset backed securitisation as the first choice in dealing with bad loans within three years, making it the most popular choice.

Nearly 59 per cent of respondents quoted the changing macroeconomic landscape as the main reason for worsening credit assets, including slower economic growth, the effects of economic restructuring and the aftermath of the country’s earlier debt-fuelled growth model.

Asset quality has yet to turn around in China despite signs of improvement in terms of NPL ratio in the fourth quarter
Yang Yue, China Zheshang Bank

Only 4 per cent said they expect China’s economy to grow above 7 per cent within three years, while 78.7 per cent expect growth of between 6 to 7 per cent, and the remaining 17.3 per cent see growth of less than 6 per cent.

China’s economy grew 6.7 per cent in 2016, the slowest growth in 26 years.

The banking sector’s non-performing loan ratio rose to 1.74 per cent as of the end of 2016, up from 1.67 per cent a year ago, according to China Banking Regulatory Commission data. On a quarterly basis, the NPL ratio inched down by 0.02 percentage points, the first quarterly decrease since the third quarter of 2011.

Outstanding bad loans increased to 1.51 trillion yuan as of the end of December, up 19 per cent from a year earlier.

About 70 per cent of respondents said they expect growth in bank revenue and profits to be lower than 10 per cent within three years, the survey said.