China’s biggest banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating borrowers are struggling amid an economic slowdown.
The nation’s 10 largest lenders reported overdue loans reached 588 billion yuan ($94 billion) at the end of 2013, a 21 percent increase from a year earlier to the highest level since at least 2009. The rise in late payments portends more losses on soured loans for banks in coming months as China’s slowing economy crimps companies’ earnings, while a government crackdown on non-bank funding makes it tougher for borrowers to get new credit or finance older debt.
“Overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “While we believe Chinese banks’ credit woes will unfold gradually, the disturbing thing is that the end is nowhere in sight.”
Overdue loans, those late by at least a day, were 31 percent greater for the banks as of Dec. 31 than nonperforming ones, which are debts they don’t expect to recoup in full. That’s the biggest gap in at least five years, signaling lenders may be resisting acknowledging the deterioration to avoid setting aside funds to cover potential losses.
While nonperforming loans reported by China’s banking industry have increased for 10 straight quarters to the most since September 2008, they accounted for only 1.04 percent of total loans as of the end of March, compared with the 4.83 percent average of the previous decade, data from the China Banking Regulatory Commission show.
That bad-debt ratio may rise to as much as 1.5 percent, the highest since December 2009, if economic growth slows significantly or slumping property prices hurt companies linked to real estate, according to a May 16 forecast by Bank of Communications Co.
Investors’ concern that the bad-loan ratio may be wider than reported by the lenders is weighing on their shares. The 16 publicly traded Chinese bank stocks’ average valuation of 0.77 times estimated net assets for this year reflects a nonperforming-loan ratio of 5.8 percent, according to an April report from Guotai Junan Securities Co.
Shares of Industrial & Commercial Bank of China Ltd., the nation’s largest bank, dropped 3.8 percent this year in Hong Kong, while the city’s Hang Seng Index slipped 1 percent. ICBC rose 1.6 percent to close at HK$5.04 today.
China Construction Bank Corp., No. 2 among the nation’s lenders by assets, pared its decline for the year to 2.9 percent, while third-ranked Agricultural Bank of China Ltd. slid 9.7 percent. Bank of China Ltd. climbed 0.8 percent today, extending its gain this year to 2 percent. All four lenders are controlled by the government and based in Beijing.
China’s economy, the world’s second largest, is forecast to expand 7.3 percent this year, the slowest pace since 1990, based on the median estimate in a Bloomberg survey. Profit growth at the nation’s industrial companies slowed to 9.6 percent in April from 10.7 percent a month earlier, the statistics bureau reported today.
China Vanke Co., the nation’s biggest developer, said this week that the “golden era” for the nation’s property market has passed, while Moody’s Investors Service revised its credit outlook for Chinese developers to negative last week after home sales slumped 10 percent in the first four months. The housing market threatens Premier Li Keqiang’s efforts to put the brakes on the economic slowdown.
That’s triggering the rise in delinquencies for Chinese banks, which added 89 trillion yuan of assets over the past five years, or about equal to the entire U.S. banking industry, CBRC data showed.
S&P’s Liao predicted that the nonperforming-asset ratio, which he calculated by including advances with overdue payments that haven’t yet been booked as soured loans, will widen to about 3 percent by the end of 2014 from the current 2 percent.
Press officials at Beijing-based CBRC didn’t return three phone calls seeking comment.
Chinese banks classify loans into five categories -- normal, special mention, substandard, doubtful and loss -- depending on the number of overdue days, prospects for repayment and potential impairment losses. The last three categories are counted as nonperforming.
Existing rules stipulate that when repayment on a loan is overdue by 91 to 180 days and the borrower can’t fully repay the amount, it should be marked as substandard. Doubtful loans are when repayments are late by 180 days or more, with banks anticipating significant losses. The loss category is for debts that the lender determines it can’t recoup, even by legal means.
While the classification of nonperforming loans is a subjective assessment and banks have different internal criteria, there’s little leeway for overdue loans, Victor Wang, a Hong Kong-based analyst at Credit Suisse Group AG, wrote in an April 4 note. A single late payment can result in the entire balance being marked as overdue and reported as such in exchange filings, he wrote.
China’s five largest banks, which include Shanghai-based Bank of Communications and control 43 percent of the nation’s banking assets, had 455 billion yuan of overdue loans as of the end of last year, 22 percent more than their nonperforming debt, according to the banks’ annual reports published in March. ICBC’s overdue loans were 40 billion yuan higher than its soured debt, the biggest gap among the 10 largest banks.
Spokesmen at ICBC, Construction Bank, Bank of China and Bank of Communications declined to comment, while Agricultural Bank didn’t respond to requests.
The gap for smaller banks is even wider as they’re less stringent than bigger ones in classifying loans. China Merchants Bank Co., Shanghai Pudong Development Bank Co., China Citic Bank Corp., Industrial Bank Co. and China Minsheng Banking Corp. had 133 billion yuan of overdue loans as of Dec. 31, 77 percent more than the bad debt they reported, exchange filings show.
Press officers of Citic Bank and Minsheng Bank, which are based in Beijing, declined to comment, while officials at Shenzhen-based Merchants Bank, Shanghai-based Pudong Bank and Fuzhou-based Industrial Bank didn’t respond to requests.
China has spent more than $650 billion rescuing banks by carving out bad loans and injecting capital since the late 1990s, after years of government-directed lending caused defaults to balloon. In March 2005, the nonperforming-loan ratio at the state-owned banks stood at 15 percent.
While late loans may not always turn into bad debt, they “clearly” indicate rising default risks, according to E Yongjian, an analyst at Bank of Communications in Shanghai.
“We will see banks book more loans as nonperforming and beef up their provision charges,” he said. “The gap may also indicate a shift away from the banks’ stringent bad-loan recognition policy of the good old days, when economic growth was strong and profit was abundant.”
In 2010, when the economy expanded 10.4 percent, the fastest pace in three years, the relationship between overdue loans and sour debt was inverted. Nonperforming loans exceeded overdue advances by 14 billion yuan then, company filings show.
Bank officials at the subdivisions of branches and smaller outlets have an incentive to report lower levels of bad loans because their performance and pay is tied to the metric, Tang Yayun, a Shanghai-based analyst at Northeast Securities Co., said by phone. They’re able to do so by rolling over the debt or putting loans in the special-mention category, she said.
ICBC, Construction Bank and Bank of China said in March that they stepped up collection efforts to keep bad loans in check, without specifying details.
The top 10 publicly traded banks wrote off or sold 92 billion yuan of soured loans in 2013, almost triple the previous year’s amount, lowering their bad-loan ratio to 0.99 percent, PricewaterhouseCoopers LLP said in April. Without those write-offs, the ratio would have been about 1.2 percent, PwC said.
“The NPL balance will rise in the future as there’s a time lag between the two indicators,” said Raymond Yung, the China financial-services leader at PwC. “That said, overdue loans is a good measure, but it’s not a decisive one. The value of collateral matters a lot in classifying NPLs.”
Nonperforming loans at China’s banks rose by an additional 54 billion yuan in the three months through March, the biggest quarterly increase since 2005, to 646.1 billion yuan, according to CBRC data released May 15.
Their combined profit of the banks rose 16 percent from a year earlier to 427.6 billion yuan in the first quarter, and the lenders set aside reserves covering 274 percent of bad loans, the data show.
Banks are facing pressures on asset quality, liquidity and lending margins, China Huarong Asset Management Co. Chairman Lai Xiaomin said at an April 15 meeting. The Beijing-based company is China’s largest state-owned manager of soured debt.
The business environment this year has been “grim and complicated,” Lai said.
That comment was echoed by Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. Chinese companies across industries are struggling to make repayments, with the corrosion spreading now to real-estate companies, she said.
“Chinese banks’ asset quality is deteriorating at a faster rate than we had anticipated,” Yuan said. “There’s no doubt that more defaults are on the horizon.”
— With assistance by Jun Luo