China's Banks Getting Less Strict on Bad Loans, Moody's Says

  • Lenders fail to include some debt overdue at least 90 days
  • Chinese banks' profits to weaken further in second half

China’s banks are getting less strict in recognizing bad loans, failing to include some debts that have been overdue for at least 90 days, according to Moody’s Investors Service.

The ratings company cited its analysis of the first-half results of 11 listed banks including Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp., in a statement in Hong Kong on Monday.

Moody’s argues that the pace of the increase in loans overdue for at least 90 days isn’t being reflected in increases in overall bad-loan numbers in a struggling Chinese economy.

The Moody’s assessment highlights investors’ concerns that Chinese lenders’ bad debts may be understated, a factor dragging on their shares. While the industry’s nonperforming loan ratio stood at 1.5 percent as of June 30, Guotai Junan Securities Co. calculated in May that 16 listed lenders’ shares were priced as if their soured credit stood at an average of more than 11 percent.

Instead of focusing on banks’ bad-loan ratios, Moody’s has turned to studying delinquencies of 90 days and more. The ratio for that debt rose by 77 basis points in the first half for the 11 banks studied, outstripping a 24 basis point gain in the ratio for their total nonperforming loans, according to Christine Kuo, a senior vice president.

Chinese banks classify loans into five categories -- normal, special mention, substandard, doubtful and loss -- depending on the number of overdue days and the probability of losses. The last three categories are counted as nonperforming. 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.

Moody’s Kuo expects Chinese banks’ profits to deteriorate further in the second half because of bad loans and declines in net interest margins and fee income from stock-related services.