City-level banks see NPLs rise in first quarter

City commercial banks' nonperforming loans and NPL ratios continued to rise in the first quarter, but their situation was still better than that of listed banks.

As of March 31, the balance of NPLs for city commercial banks rose to 61.92 billion yuan ($9.98 billion) from 54.8 billion yuan at the end of December. The average NPL ratio increased to 0.94 percent from 0.88 percent, according to the China Banking Regulatory Commission.

As of March 31, the balance of NPLs for 16 A-share listed banks hit 517.9 billion yuan with an average NPL ratio of 1.01 percent, said Ernst & Young LLP in a report.

Steven Xu, partner of EY Financial Services, said city commercial banks stripped out bad assets during the banks' restructuring and shareholding reforms in recent years, which contributed to the good performance of city commercial banks in terms of financial risk management during the first quarter, as well as for 2013.

Xu noted that last year, NPLs for listed banks were concentrated in the Yangtze River Delta and Pearl River Delta. For city commercial banks outside these regions, regional financial risks were relatively low.

The banks' solid foundation in local areas also helped limit their bad loans.

"Compared with large nationwide commercial banks, city commercial banks have a deeper understanding of local companies and deeper long-term cooperation with the companies. This advantage helps city commercial banks avoid or leave poorly performing sectors," said Xiang Qi, vice-president of research for CITIC Securities Co Ltd.

Xiang forecast that the asset quality of A-share listed city commercial banks (Bank of Beijing Co Ltd, Bank of Nanjing Co Ltd and Bank of Ningbo Co Ltd) will remain superior to that of joint-stock commercial banks due to effective management and geographical advantages, assuming that no regional financial risks arise.

"But nationwide, the risk management capability of a large proportion of city commercial banks is lower than the average level of listed banks. We cannot rule out the possibility that some city commercial banks will have serious problems during the course of business operations," he said.

The problems may occur in city commercial banks that aren't located in provincial capitals, as well as those in underdeveloped regions where local banks' risk controls are weaker than those of developed regions, he added.

While acknowledging the performance of A-share listed city commercial banks, Xiang raised doubts about the NPL figures of other city commercial banks, saying that many had concealed the actual quality of assets through inadequate disclosure of information.

A financial expert who declined to be identified said that some unlisted city commercial banks reported only one-third of their real NPLs to banking regulators.

Ni Jun, a financial analyst at Shanghai-based Greenwoods Asset Management Ltd, said that city commercial banks have close ties to local government financing vehicles, which are set up by local governments to raise funds primarily for infrastructure and real estate development projects.