Chinese banks prepared for possible bad loan rises

June 03 2011



BEIJING, June 3 (Xinhua) -- Banks in China are under pressure to control the quality of their assets, but their bad loan risks might be overstated as banking regulator has introduced stricter requirement to prepare for such, Chinese experts have said.

Chinese banks may see their asset quality fall at some time in the future if the country's monetary tightening policies and liquidity squeezes continue, said Guo Tianyong, director of the Banking Industry Research Center with the Central University of Finance and Economics.

"But their non-performing loan (NPL) ratios will by no means rise to 10 percent," Guo said, rejecting warnings by U.S. credit rating agency Standard & Poor's (S&P) of outlook for Chinese lenders last week.

S&P said they expect cumulative NPLs in China's banking sector to account for 5 to 10 percent of the sector's total loans over the next three years.

S&P are predicting a difficult scenario in which lending rates go up significantly and government support to project the sector's loans turns out to be negligible.

"Their statements are too sensational," Guo said, citing data and precautionary measures by China's banking regulator as reason.

According to the China Banking Regulatory Commission (CBRC), the outstanding NPLs of Chinese commercial banks dipped by 300 million yuan (about 46 million U.S. dollars) from the fourth quarter of last year to hit 433.3 billion yuan by the end of March this year.

The average NPL ratio for Chinese banks stood at 1.1 percent in the first quarter, almost unchanged from last year, according to quarterly bank reports.

"We are aware of the reports about China's banking sector by some foreign rating agencies, but we think some of the remarks were purposely made to tarnish the image of China's banks," said a source close to China's banking regulator, who requested anonymity.

Last month, the CBRC announced stricter regulations for commercial banks in order to help the financial institutions decrease their financial risks.

The CBRC set the minimum capital adequacy ratio (CAR) for banks of systematic significance at 11.5 percent, while the CAR for banks of non-systematic significance was set at 10.5 percent.

China's banking regulator has repeatedly raised the minimum CAR to slow loan growth and rein in credit risk after 17 trillion yuan in new loans were extended over the past two years as part of the Chinese government's crisis-combating stimulus package.

Before the global financial crisis occurred, the minimum CAR for banks in China was 8 percent.

Liu Mingkang, chairman of CBRC, said last December that the regulatory authority expected that Chinese banks' NPL ratios would climb slightly in the future, taking into account factors such as local government-backed financing vehicles (LGFVs), the property market and the restructuring of China's economy.

"An NPL ratio of 2 percent is acceptable and reasonable for a swiftly developing country like China," Liu said.

To deal with possible rises in NPLs amid excess lending, CBRC have raised provision ratios for outstanding loans in the past years.

The average provision ratio for China's major commercial banks was only 6.9 percent in 2002. The ratio expanded to 41.2 percent in 2007, 115.3 percent in 2008 and 230 percent in the first quarter of this year.

Even if NPLs rise rapidly in the future, they will still be manageable for Chinese banks with such a high provision ratio, said the Anbound Group, a Beijing-based consulting company.

The rapid pace of bank lending, as well as excessive liquidity, pushed up asset prices and drove inflation up to 5.3 percent by April this year, prompting the Chinese government to adopt a series of measures to curb price hikes.

China's central bank has raised interest rates four times this year, with rates rising from 2.5 percent last October to their current level of 3.25 percent for one-year deposits.

The Chinese government has also imposed harsh restrictions on the property market, where most bank loans have ended up over the last two years.

Major changes in Chinese banks' NPLs may have come from the country's large number of LGFVs, according to the Anbound Group.

By the end of 2010, China had more than 10,000 LGFVs. Seventy percent of them were supported by county-level governments, which usually have weak solvency due to low revenues, according to a report released by China's central bank, the People's Bank of China (PBOC), on Wednesday.

Loans granted by LGFVs accounted for less than 30 percent of the banking sector's lending, the PBOC said in the report, without giving specific number.

As the outstanding yuan-denominated loans totaled 45 trillion yuan at the end of last year, the LGFVs might have granted loans up to 13.5 trillion yuan.

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