Saturday 21 March 2009
Looming Bad Loans May Spell Trouble for Banks
As Chinese banks disclose their 2008 annual reports, the economic slowing’s influence on bank loan quality is emerging. The Bank of Communications (BOCOM) reported a 40% net profit growth in 2008, but in the fourth quarter bad loans increased and asset quality declined.
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Looming Bad Loans May Spell Trouble for Banks
CSC staff, Shanghai
21 March 2009
As Chinese banks disclose their 2008 annual reports, the economic slowing’s influence on bank loan quality is emerging. The Bank of Communications (BOCOM) reported a 40% net profit growth in 2008, but in the fourth quarter bad loans increased and asset quality declined.
According to Essence Securities’ analysis, BOCOM’s fourth quarter asset quality declined from 1.75% at the end of the third quarter to 1.92% by the end of the year. In the fourth quarter alone its bad loan balance rose about 2.7 billion yuan. Taking bad loans already written off into account, BOCOM’s bad asset balance rose 861 million yuan at the first half of 2008, and 387 million yuan in the second half, mainly in the fourth quarter. Although it fails to meet the 130% provision coverage ratio suggested by supervisory departments, its credit cost in the second half of last year was higher than 50 basic points (or 1.05% if annualized).
“Both the bad loan balance and ratio are increasing steeply, indicating companies’ asset quality, especially that of industries closely related to external demand or the economic cycle, such as light industry, textiles, wholesale and real estate, has been seriously affected during the temporary economic shock led by the sharp demand decline,” said a Shenyin Wanguo report.
BOCOM said the bad loan ratio in textiles and the steel industry rose quite rapidly in the fourth quarter, as these industries had been most affected by the economic crisis last year.
The influence of the economic slowdown began to emerge seriously in last year’s third quarter. As companies were seeing liquidity dry up, banks’ bad loan ratios grew. But different business structures mean the degree and time point for the exposure of bad loans will be different for different banks.
In fact, some banks started seeing rising bad loan ratios early in last year’s first half. By June 30, 2008, the bad loan balances of China Industrial Bank and China Citic Bank totalled 4.602 billion yuan and 9.202 billion yuan, respectively, up 19 million yuan and 710 million yuan over the end of 2007. According to the third quarter report of the Bank of Ningbo, which mainly serves small- and medium-sized enterprises, its bad loan balance totalled 298 million yuan, over 100 million yuan above the total at the middle of the year.
Although most banks have yet to disclose their 2008 annual reports, behind the rising bad loan ratio is a capital shortage in some industries led by the economic decline.
The bad loan ratio hasn’t risen significantly in the first two months of this year, but many analysts worry that the situation in the second half of the year may not be rosy as banks’ exposure of bad loans is usually not very timely. The economy began to decline in the second half of last year, but many bank loans are one-year loans, so the second half of this year may see bad loans pile up. It can only be hoped that the economy will rebound in the second half with the 4 trillion yuan stimulus package taking effect.
At least at present the banking industry is not seeing large-scale defaults. Chairman Liu Mingkang of the China Banking Regulatory Commission said during this year’s session of the Chinese People’s Congress and Chinese People’s Political Consultative Conference that current figures didn’t indicate a serious decline in banks’ asset quality. While maintaining growth, supervisory departments have also ordered strict risk control. Liu Mingkang emphasized that in 2009 the banks and financial firms must reinforce bad asset management and strictly control the balance and ratio of bad loans.
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