Banks Brace for Bad Loan Jump 银行中报坏账率料大幅上升

By newsdoug on July 6, 2012

Bank of China's NPL warning It’s one thing when analysts say China’s banking sector is facing a massive bad loan crises, but quite another when someone from the industry admits there is a problem, which is what has finally happened with new remarks from Bank of China’s (HKEx: 3988; Shanghai: 601988) chairman. Analysts have been warning of this problem for more than a year now, and a regulator even added his voice to the concerns last month (previous post), after China’s top banks went on a lending binge in 2009 and 2010 as part of Beijing’s 4 trillion yuan economic stimulus package.

Many of those loans went to local governments for dubious infrastructure projects, and word has been circulating for more than a year now that many of those loans are now in danger of default. But so far as I know, no top officials at any of the nation’s major banks were admitting to any problems until now, with most reporting non-performing loan (NPL) ratios of 1 percent or less that would be the envy of their major western rivals.

In a abrupt change of that tone, Bank of China Chairman Xiao Gang has warned that his bank and its peers are facing growing pressure from an increase in NPLs, though he was quick to add that the risk is still “controllable”. (English article) Xiao made his remarks at a China-Japan forum in Boao, an interesting choice as it’s a public venue but likely to attract less attention since it’s not specifically devoted to banking.

His remarks come just a month after a top banking regulator expressed surprise at the “contradictory” fact that China’s top banks had yet to report significant rises in NPLs, even though many had seen recent surges in some categories of loans considered “problematic.”

I’ve been in the reporting business long enough to know that when industry executives start admitting publicly that there’s a problem, it means the problem is actually quite large and there’s no way to hide it anymore. Such remarks are also usually a sign that the issue will soon start to show up in their quarterly financial statements, meaning we can expect to see Chinese banks reporting some significant jumps in their NPL rates starting as soon as next month when they release their second quarter results.

My guess is that the banks were hiding their bad loans by labeling them as problematic without actually giving them the official NPL designation for fear of alarming the markets and central leaders in Beijing dealing with China’s economic slowdown. Now the banks are being told to finally confess to the problem — a necessary step before they can actually deal with an issue that could ultimately result in massive write-downs and potentially the need for new cash infusions.

I commend the banks for finally admitting publicly to the problem, though the fact that they waited so long shows they still quite a ways from behaving like true commercial lenders. On the more practical front, look for the banks’ NPL rates to jump to the 1-2 percent range in their second quarter results, and perhaps to as high as 3-4 percent by year end.

Bottom line: The admission by Bank of China’s top official of a looming NPL problem is setting the stage for major banks to report big jumps in their NPLs in their mid-year results.

Enjoy this blog? Please spread the word :)