Risks grow from NPLs as loans rapidly increase
While Chinese banks still have the capability to absorb nonperforming loans (NPLs), risks are high and continue to grow as loans pile up to fuel the growth, experts said.
As Chinese banks accumulate NPLs, nine in 15 respondents in a Bloomberg survey in June said they anticipate a government-backed recapitalization within two years, but some experts said a major recapitalization won't be necessary.
"At the moment, banks have enough profits to write off 2.5 to 3 percent of bad debts every year if they are willing to do it on their balance sheets," Liao Qiang, senior director of financial institutions at ratings agency Standard and Poor's, told the Global Times on Monday.
But that doesn't mean NPL risks are low. According to Liao, the country's fast-growing loans, still a major driver of economic growth, pose the biggest risk. With the continuous rise in NPLs, maybe after one or two years, the current liquidity buffer will be wiped out, which could lead to systematic risks.
China should accelerate its economic transformation, and should no longer rely on the credit-fueled growth, Liao noted.
It's highly unlikely that a country could maintain growth while also deleveraging. A deleveraging takes place when the credit growth is slower than GDP growth.
The country's 2016 target for credit growth is 13 percent, while GDP growth has been set at 6.5 percent.
The situation somehow explains why overseas financial institutions are so interested in working out various estimates for China's NPL ratio. For instance, Credit Lyonnais Securities Asia estimated China's NPLs were probably closer to 11.4 trillion yuan ($1.71 trillion) in 2015, while JP Morgan said it was at 8 percent, according to media reports.
Understated NPLs
The figures are high compared with China's official NPL level, which is widely suspected to be significant understated as it seems too good to be true by international standards.
NPLs in China's commercial banks reached 1.39 trillion yuan by the end of the first quarter, or 1.75 percent of total loans, according to data from the China Banking Regulatory Commission (CBRC). The ratio was at 1.39 percent by the end of 2015.
The CBRC figures fail to accurately reflect the true scale of bad loans because, against the backdrop of the slowing economy, many troubled loans that should be recognized as NPLs have been wrongly classified as special mention loans (SMLs), Liao said.
SMLs are loans with which borrowers are experiencing difficulties that may threaten repayment.
Moody's assistant vice president Yulia Wan also noted that the official NPL ratio likely understates the pace of asset deterioration as the banks increased their NPL sales and write-offs.
"Also, there is an increasing difference between the NPL ratio and the 90-plus-day delinquencies ratio, indicating more 90-plus-day delinquency loans are not recognized as NPLs," Wan told the Global Times in an e-mail on Tuesday.
The IMF also issued a report in April, which estimates China's debt-at-risk accounted for 15.5 percent of the 52.6 trillion yuan of corporate loans in 2015, with total risky loans reaching 8.2 trillion yuan and potential losses at about 6.9 percent of the country's GDP.
But that data also fails to faithfully measure China's risky loans scale, according to Liao, as it excludes individual loans and loans provided by local government financing vehicles, and there is a tinge of overstatement when the IMF said a company's loan is potentially at risk if its interest coverage ratio (pretax profit-to-interest expense) is smaller than 1, which doesn't suit Chinese companies perfectly.
Liao suggested NPLs and SMLs should be combined to evaluate China's bad loans, which, according to the CBRC data, was at 5.76 percent at the end of the first quarter.
China is exploring different options to deal with the increasing NPLs, including debt-equity swap, NPL securitization and NPL sales to assets management companies.
None of these options really address the problem. For instance, the swap can only be applied to viable companies, and it wouldn't help much for unviable ones burdened with excess capacity, Yu Fenghui, a senior executive at the Agricultural Bank of China, told the Global Times on Monday.
