Chinese banks’ asset quality improves on bad-loan write-offs, but pressures remain

The asset quality of China’s listed banks improved in 2017 with the trend continuing in the first quarter of this year, but borrowers from industries inundated with capacity glut and high leverage were still exposed to credit risks, putting lenders’ loan quality under significant pressure, according to a report released by consultants EY on Tuesday.

“In terms of asset quality in the second-half onwards [of 2018], we are still cautious as the fall in non-performing loans ratio in 2017 can be partly attributed to the greater bad-loan write-offs and disposals,” said Steven Xu, partner of financial services at EY Hua Ming. “It can hardly be said that we have come to an inflection point. It is better not to be too optimistic.”

EY’s study of 41 listed state-owned banks showed that their NPLs in 2017 increased by just 56.8 billion yuan (US$9 billion) to 1.3 trillion yuan, with the weighted average NPL ratio dropping to 1.55 per cent from 1.65 per cent in 2016.

The portion of special mention loans and overdue loans, two categories that could deteriorate into NPLs, also fell.

The lenders continued to show improvements in the first quarter of this year. The NPL ratio of 29 listed banks dropped from 1.55 per cent to 1.52 per cent at the end of March, while year-on-year net profit growth accelerated to 5.95 per cent from 4.87 per cent.

But data from the China Banking and Insurance Regulatory Commission showed that the banking sector’s NPL ratio showed a marginal uptick from 1.747 per cent at the end of 2017 to 1.75 per cent at the end of March, the first increase in five quarters.