NPLs to rise more slowly, no sys­temic risk seen

Lib­er­al­iza­tion of in­ter­est rates is lead­ing to new busi­ness mod­els em­pha­siz­ing ser­vice fees

China Daily (USA) - - BUSINESS - By JIANG XUEQING jiangx­ue­qing@chi­nadaily.com.cn

Chi­nese banks will con­tinue to see a slight in­crease in the ra­tio of non­per­form­ing loans although the rise in bad loans will not lead to sys­temic risk in the bank­ing sec­tor, an­a­lysts said.

“As China has not yet com­pleted re­struc­tur­ing of the real econ­omy, ex­ist­ing loans will in­evitably face the pres­sure of credit risk,” said Zeng Gang, di­rec­tor of bank­ing re­search at the In­sti­tute of Fi­nance and Bank­ing un­der the Chi­nese Academy of So­cial Sci­ences.

Agri­cul­tural Bank of China Ltd recorded year-on-year growth of its NPL bal­ance of 28.28 per­cent to 229.82 bil­lion yuan ($34 bil­lion) and its NPL ra­tio rose by 37 ba­sis points to 2.39 per­cent as of the end of Septem­ber, both num­bers be­ing the worst of the big four com­mer­cial banks. In­dus­trial and Com­mer­cial Bank of China Lim­ited was sec­ond, with an NPL ra­tio in­crease by 18 ba­sis points to 1.62 per­cent.

Zeng said Chi­nese banks have suf­fi­cient loan im­pair­ment pro­vi­sions and prof­its to bear the pres­sure. Bank of China Ltd and its sub­sidiaries, for in­stance, in­creased im­pair­ment losses on as­sets by 42.49 per­cent dur­ing the first three quar­ters of 2016, com­pared with the same pe­riod of last year.

“About 60 to 70 per­cent of Chi­nese bank loans are col­lat­eral loans, which will cause a low ra­tio of ac­tual loss. With the coun­try push­ing sup­ply-side re­forms for­ward and the real econ­omy get­ting bet­ter, banks will reach a turn­ing point,” he said.

Cur­rently, banks are ex­plor­ing newways to han­dle ris­ing NPLs. Since the be­gin­ning of this year, the four largest com­mer­cial banks have is­sued non­per­form­ing as­set-backed se­cu­ri­ties to­tal­ing more than 6.7 bil­lion yuan. Be­sides, China’s bank­ing reg­u­la­tor is sup­port­ing the devel­op­ment of lo­cal as­set man­age­ment com­pa­nies to en­hance their abil­ity to dis­pose of bad as­sets.

ZhangXin­grong, head of bank­ing re­search at Bank of China’s In­sti­tute of In­ter­na­tional Fi­nance, said: “Bad as­sets dis­posal will ben­e­fit from the new poli­cies to re­lax re­stric­tions on lo­cal as­set man­age­ment com­pa­nies and en­cour­age se­cu­ri­ti­za­tion backed by non­per­form­ing Zeng Gang, as­sets. We es­ti­mate that the growth of NPLs will slow down, although NPL ra­tios will still in­crease slightly year-on-year.”

While NPL ra­tios were on the rise dur­ing the first nine months of 2016, the “Big Four” banks con­tin­ued to post slim growth of net profit at­trib­ut­able to eq­uity hold­ers of the bank, rang­ing from 0.46 to 2.48 per­cent.

“The profit growth of most Chi­nese banks has fallen to sin­gle dig­its and will even turn neg­a­tive, truly re­flect­ing the cur­rent state of the real econ­omy,” said Zeng of the CASS.

China’s in­ter­est rate lib­er­al­iza­tion led to the shrink­ing of net in­ter­est mar­gins, and the re­struc­tur­ing of the real econ­omy made it dif­fi­cult for banks to con­tinue re­ly­ing on credit for in­come growth. At the same time, banks in­creased loan im­pair­ment pro­vi­sions to deal with ris­ing NPLs. A com­bi­na­tion of all these fac­tors trig­gered a slow­down in profit growth for banks.

“To im­prove their prof­its, banks will­make stronger ef­forts to in­crease in­ter­me­di­ary busi­ness in­come by de­vel­op­ing in­vest­ment bank­ing, wealth man­age­ment, bank card ser­vices and as­set cus­tody,” he said.

Dur­ing the first three quar­ters of 2016, Bank of China and its sub­sidiaries sawa 28.1 per­cent year-on-year growth of non-in­ter­est in­come to 140.47 bil­lion yuan, rep­re­sent­ing al­most 38 per­cent of the to­tal op­er­at­ing in­come. The other three largest com­mer­cial banks also posted in­creases of non-in­ter­est in­come or net fee and com­mis­sion in­come.

Zhang said banks will look for a new en­gine of profit growth in the Belt and Road Ini­tia­tive, emerg­ing in­dus­tries, ren­minbi in­ter­na­tion­al­iza­tion and per­sonal fi­nan­cial ser­vices.

The profit growth of most Chi­nese banks has fallen to sin­gle dig­its and will even turn neg­a­tive, truly re­flect­ing the cur­rent state of the real econ­omy.”

di­rec­tor of bank­ing re­search at the In­sti­tute of Fi­nance and Bank­ing un­der the Chi­nese Academy of So­cial Sci­ences Agri­cul­tural Bank of China Ltd’s year-on-year growth of its NPL bal­ance as of the end of Septem­ber

ZHONGDE / FOR CHINA DAILY MENG

A man counts cash at an Agri­cul­tural Bank of China branch in Qiong­hai, Hainan prov­ince.

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