China's banks bad loans rise to high­est in a decade

The Pak Banker - - FRONT PAGE -

Band loans at Chi­nese com­mer­cial banks rose to the high­est level since June 2006 as the na­tion's eco­nomic ex­pan­sion slowed to the weak­est pace in a quar­ter cen­tury.

Non­per­form­ing loans rose 7 per­cent from Septem­ber to 1.27 tril­lion yuan ($196 bil­lion) by De­cem­ber, the slow­est quar­terly in­crease in two years, data from the China Bank­ing Reg­u­la­tory Com­mis­sion showed Tues­day.

In­clud­ing "spe­cial-men­tion" loans, where fu­ture re­pay­ment is at risk but yet to be­come non­per­form­ing, the in­dus­try's to­tal trou­bled loans swelled to 4.2 tril­lion yuan, rep­re­sent­ing 5.46 per­cent of to­tal ad­vances. Con­cern over bor­row­ers' abil­ity to ser­vice debt has weighed on Chi­nese lenders, with shares of the na­tion's four largest banks trad­ing at val­u­a­tions at least 35 per­cent below a gauge of their emerg­ing­na­tion peers. China's econ­omy grew last year at its slow­est pace since 1990.

"The slower quar­terly in­crease in NPLs are likely to be re­sults of stepped-up ef­forts by banks to rec­ol­lect loans, more ag­gres­sive write-offs, and some re­lax­ation in their bad-loan recog­ni­tion stan­dards," said Chen Shu­jin, a Hong Kong­based an­a­lyst at DBS Vick­ers Hong Kong Ltd. "We don't ex­pect to see any turn­around of as­set qual­ity un­til the end of this year."

Sep­a­rately, the Peo­ple's Bank of China re­ported Tues­day that new credit surged in Jan­uary to a record 3.42 tril­lion yuan, al­most dou­ble the amount in De­cem­ber and ex­ceed­ing the me­dian fore­cast of 2.2 tril­lion yuan in a Bloomberg sur­vey of an­a­lysts. The in­crease was linked to a sea­sonal binge as banks front­loaded lend­ing and Chi­nese bor­row­ers re­fi­nanced for­eign-de­nom­i­nated debt.

The CBRC data comes amid spec­u­la­tion that soured loans could be much larger than in­di­cated by of­fi­cial data.

Kyle Bass, a hedge fund man­ager who suc­cess­fully bet against mort­gages dur­ing the sub­prime col­lapse, said ear­lier this month that the Chi­nese bank­ing sys­tem may see losses of more than four times those suf­fered by U.S. lenders dur­ing the 2008 credit cri­sis. That claim has been dis­puted by DBS's Chen and an­a­lysts at China In­ter­na­tional Cap­i­tal Corp and Mac­quarie Se­cu­ri­ties Ltd.

Should the Chi­nese bank­ing sys­tem lose 10 per­cent of its as­sets be­cause of non­per­form­ing loans, the na­tion's banks will see about $3.5 tril­lion in their equity van­ish, Bass, the founder of Dal­las-based Hay­man Cap­i­tal Man­age­ment, wrote this month in a let­ter to in­vestors ob­tained by Bloomberg. Larry Hu, a China econ­o­mist at Mac­quarie in Hong Kong, said in a re­search note on Mon­day that Bass's es­ti­mate could be too large as it im­plied a true bad-loan ra­tio for China banks at 28 to 30 per­cent.

The in­dus­try's bad-loan cov­er­age ra­tio, a mea­sure of its abil­ity to ab­sorb po­ten­tial losses from soured credit, weak­ened to 181 per­cent in De­cem­ber from more than 200 per­cent a year ear­lier, sig­nal­ing a drag on fu­ture prof­its from the need to set aside ad­di­tional re­serves. The min­i­mum re­quired level is 150 per­cent.

Shang Fulin, chair­man of the bank­ing reg­u­la­tor, told an in­ter­nal meet­ing last month that banks would be forced to re­struc­ture, in­ject new cap­i­tal or change their se­nior man­age­ment if key risk in­di­ca­tors, such as bad-loan cov­er­age and cap­i­tal ad­e­quacy ra­tios, fall out­side "rea­son­able ranges," ac­cord­ing to peo­ple fa­mil­iar with the sit­u­a­tion.

The Hong Kong-listed shares of In­dus­trial & Com­mer­cial Bank of China Ltd. cur­rently trade at 4.2 times their pro­jected 12-month earn­ings, the high­est val­u­a­tion among China's four largest lenders by as­sets. That com­pares with a mul­ti­ple of 6.5 times for the MSCI Emerg­ing Mar­kets Banks In­dex, ac­cord­ing to data com­piled by Bloomberg. DBS's Chen said China banks are trad­ing at trough value and it is the time for in­vestors to start ac­cu­mu­lat­ing. ICBC shares rose 2.8 per­cent to HK$4.02 in Hong Kong as of 11:40 a.m., and Bank of China Ltd. rose 2.7 per­cent to HK$3.

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