Top banks weighed down by overdue loans

Bad loans are weighing heavily on China's top commercial banks this year, and are likely to hit profitability and asset quality, a report released by PwC claimed on Thursday.

The study revealed that total overdue loans among the country's top 10 listed banks had increased to 486.5 billion yuan ($79.3 billion) by the end of last year, up 29 percent from 2011.

The average overdue loan ratio rose to 1.21 percent from 1.06 percent, "a considerable deterioration", said Jimmy Leung, PwC's banking and capital markets leader for China.

In some regions, the ratio reached 5 to 7 percent, he added.

The ratio of special-mention loans, debts that could potentially turn sour, among the five largest joint stock banks rose to 1.03 percent in 2012 from 2011's 0.93 percent.

Chinese banks follow the international five-category system that classifies loans as "pass", "special-mention", "substandard", "doubtful" and "loss", in line with their inherent risks. The last three groups are regarded as non-performing loans.

The overall percentage of NPLs among the top 10 banks stood at 0.82 percent by the end of 2012, up 0.01 percent from the previous year, said PwC. The overall NPL balance amounted to 376.2 billion yuan, increasing by 24.9 billion yuan from a year earlier.

"The economic uncertainties and tightened rules on the real estate market would pose a tougher test for commercial lenders this year," added Raymond Yung, PwC's financial services leader for China.

"If property prices show big declines, bank lending would be in jeopardy."

Yung said the operating environment for Chinese banks continued to be difficult in 2013, and effective risk management continues to be a challenge as macroeconomic contractions continue to exert pressure on loan assets held by the banking sector.

"It's time for Chinese banks to strengthen their management of collecting repayments, and writing off more soured loans more positively."

The 10 listed banks covered by the study include the five largest State-owned lenders — the Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd, Bank of China Ltd, and Bank of Communications Co Ltd.

And the five major joint stock banks covered by the study are China Merchants Bank Co Ltd, Industrial Bank Corp Ltd, China Minsheng Banking Corp Ltd, Shanghai Pudong Development Bank Co Ltd, and China Citic Bank Corp.

Yung said although the banks were aware of the asset quality deterioration, they still had strong momentum to extend loans to riskier sectors, especially to small enterprises, for higher returns.

"The sales of wealth management products have continued to squeeze bank deposits, meaning less money available to lend out. Therefore, they have tended to seek higher returns for each sum of lending," he added.

In 2012, China's commercial banks issued a total of 31,673 wealth management products, worth 7.6 trillion yuan, a 68 percent increase on the previous year.

The massive growth in sales of the products has generated considerable industry concern over China's shadow banking sector.

On Thursday, the Chinese central bank issued a report in which it said the market should "fend off any systemic risks" of wealth management products, "while allowing these products to play a positive role, by guiding banks to develop the business in a prudent and legal way".

It said returns from such products must match their risk. Banks must ensure they set aside sufficient provisions to cover their selling, while releasing regularly updated information related to the products.

Zhu Haibin, chief China economist at JPMorgan Chase & Co, said that China's shadow banking sector could now be worth as much as 36 trillion yuan, 69 percent of China's GDP and could double in two years.