China Bad Loans to Increase, China Orient Asset Says – November 2012

BEIJING–Chinese commercial banks may face a 10% rise in bad loans this year as slowing growth in the world’s second-largest economy has taken a toll on their asset quality, a state-run debt clearing agency said in a report.

Orient Asset Management Corp., one of the four state-owned companies tasked with clearing bad debts for China’s Big Four state-owned banks before they listed shares, said loans to the steel, ship-building and solar sectors were at risk of turning sour, as were loans to exporters, government financing vehicles and property developers.

The nonperforming loan ratio for Chinese banks could rise to an average 1%-2% by the end of the year from 0.97% at the end of the third quarter, said the report, which was finished late last month but released last week.

In their third-quarter earnings reports, China’s biggest state-run banks recorded flat or declining NPL ratios and also said they increased their bad-loan provisions for the third consecutive quarter.

The report said banks are also under pressure to dispose of their NPLs as strict new capital rules are due to take effect at the beginning of next year.

Major state-owned banks are required to have a minimum core capital adequacy ratio–the percentage of a bank’s equity capital and retained profits versus its risky assets–of 9.5% in order to contain risks from assets such as mortgage loans.

The Big Four banks–Industrial & Commercial Bank of China Ltd. (601398.SH), China Construction Bank Corp. (601939.SH), Bank of China Ltd. (601988.SH) and Agricultural Bank of China Ltd. (601288.SH)–have already met the requirement, according to their latest earnings reports.

The report estimated that banks in China could dispose of between 1 billion yuan and 5 billion yuan ($160 million-$800 million) of NPLs this year.

Chinese banks stopped large-scale NPL sales after 2006, and the country’s four main debt-clearing agencies have seen declining volumes of bad assets on their books, according to the report.



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