Slow economic growth to put banks under pressure

Banners for domestic and foreign banks in a street in Shanghai. A recent survey of locally incorporated foreign banks showed that they remain optimistic about business prospects in China. [Photo/China Daily]

Increasing nonperforming loans, rise of Internet finance among major challenges for sector this year

The nation pursued financial reforms in an orderly manner in 2014 by introducing measures on interest rate liberalization, expanding the scale of direct financing and accelerating the two way opening-up of its capital market.

With the deepening of financial reforms and continued slowdown of economic growth, Chinese banks will face increasing pressure from bad loans, narrowing of net interest margins and financial disintermediation this year.

To handle these challenges, banks must restructure their asset portfolios, focus on financial innovation and strive to operate across multiple markets, said bankers and researchers.

Here are the major challenges facing the Chinese banking industry and possible solutions:

Bad loans

Chinese banks will face greater pressure from bad assets this year. Economists said that nonperforming loans may rise further and the exposure to bad debts may accelerate this year.

NPLs and the overall NPL ratio of commercial banks increased continuously starting in the first quarter of 2012. As of Sept 30, 2014, NPLs amounted to 766.9 billion yuan ($124 billion), compared with 563.6 billion yuan a year earlier. During the same period, the NPL ratio increased from 0.97 percent to 1.16 percent, according to the China Banking Regulatory Commission.

Wen Bin, principal researcher at China Minsheng Banking Corp Ltd, said that economic growth has continued to slow since the beginning of 2014. As China has not yet found a new growth driver, traditional industries are facing elevated pressure of structural readjustment, and smaller businesses in related sectors are facing the threat of being acquired.

If the economy does not stabilize this year, the credit risk of some industries and companies will rise during their process of transformation.

"Although nonperforming loans and the NPL ratio are expected to rise in 2015, the overall risk can be controlled as long as China's economy does not suffer a hard landing this year and the loan-loss provisions remain at a high level, which was 247 percent as of the end of September 2014, "Wen said.

Cao Yuanzheng, chief economist at Bank of China Ltd, said that banks can handle debt risks because they had set aside more than 2.5 percent of their total lending book to cover potential bad loans.

"The average NPL ratio for banks nationwide was 1.08 percent at the end of June and we believe the probability of the ratio hitting 2.5percent is extremely low," Cao said.

Responding to the changes in macroeconomic and financial conditions, domestic banks worked harder to manage their asset quality and accelerated their resolution of bad loans.

Zhang Jinliang, executive vice-president of Bank of China Ltd, told a news conference in August that the bank had strengthened its supervision and management of key regions, areas and customers to reduce financial risks as early as possible.

Commercial banks also strengthened the collection and resolution of nonperforming assets and improved their NPA cash recoveries. They actively resolved NPAs by various means such as bulk transfers and write-offs.

In the first half of 2014, Bank of China resolved NPAs worth 27 billion yuan. The Agricultural Bank of China Ltd wrote off 6.9 billion yuan of bad debts and transferred 8.3 billion yuan of them.