China Banks’ Bad Loans Reach Highest Since Financial Crisis

Bank of Communications
Banks’ bad loan ratio may climb to 1.2 percent this year, Lian Ping, chief economist at Shanghai-based Bank of Communications Co. said on Feb. 11. Photographer: Brent Lewin/Bloomberg

Chinese banks’ bad loans increased for the ninth straight quarter to the highest level since the 2008 financial crisis, highlighting pressures on asset quality and profit growth as the world’s second-largest economy slows.

Non-performing loans rose by 28.5 billion yuan ($4.7 billion) in the last quarter of 2013 to 592.1 billion yuan, the highest since September 2008, the China Banking Regulatory Commission said in a statement on its website yesterday. Bad loans accounted for 1 percent of total lending, up from 0.97 percent three months earlier.

Chinese banks are struggling to keep soured loans in check and extend earnings growth as the slowing economy and government efforts to curb shadow financing make it harder for borrowers to repay debt. Standard & Poor’s Ratings Services said this week that loan quality will decline in 2014 as banks remain at risk from debt-laden local government financing vehicles and manufacturers with too much capacity.

“China’s economic growth turned downward with the new leadership switching policy focus to reform and risk management from emphasizing stable expansion,” said Wang Yichuan, a Wuhan-based analyst at Changjiang Securities Co. “Naturally the bad loans will increase along with the change. We expect the deterioration to continue for two more years.”

Crisis Concern

Chinese banks added 89 trillion yuan of assets, mostly through loans, in the past five years, equivalent to the entire U.S. banking industry’s, CBRC data show. By comparison, U.S. commercial banks held $14.6 trillion of assets at the end of September, according to the Federal Deposit Insurance Corp.

Investors are increasingly concerned that China’s investment through borrowing since 2008 may trigger a financial crisis, Haitong Securities Co. said in December. Liabilities at nonfinancial companies may increase to more than 150 percent of gross domestic product in 2014, raising default risks, the brokerage said. The ratio of 139 percent at the end of 2012 was already the highest among the world’s 10 biggest economies.

China’s economy grew 7.7 percent in 2013, the same rate as in 2012. Growth is forecast to drop to 7.4 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.

The country averted its first trust default in at least a decade last month as investors in a 3 billion-yuan high-yield trust product issued by China Credit Trust Co. and distributed by Industrial & Commercial Bank of China Ltd. were bailed out days before it matured.

Jilin Trust

A 973 million-yuan product issued by Jilin Province Trust Co. missed four batches of payments since November as the borrower is going through a restructuring, Shanghai Securities News reported this week. The borrower, Shanxi Liansheng Energy Co., the biggest private coal miner in the northern province, owed six trusts more than 4 billion yuan, Haitong Securities analyst Jiang Chao said in a Jan. 9 note.

Chinese’s biggest banks already tripled the amount of bad loans written off in the first half, cleaning up their books ahead of a potential fresh wave of defaults. Banks’ bad loan ratio may climb to 1.2 percent this year, Lian Ping, chief economist at Shanghai-based Bank of Communications Co., said on Feb. 11.

The government has spent more than $650 billion bailing out banks by carving out bad loans and injecting capital since the late 1990s, after years of government-directed lending caused default risk to balloon. In October 2008, it removed about 800 billion yuan of non-performing loans from Agricultural Bank of China Ltd.’s balance sheet, causing the industrywide bad-loan level to drop by more than half from 1.27 trillion yuan in just one quarter.

Combined net income at China’s banks rose 14 percent from a year earlier to 1.4 trillion yuan in 2013, slowing from a 19 percent increase in 2012, according to CBRC data.

— With assistance by Jun Luo

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