China banks’ bad loans surge most on record

SHANGHAIChinese banks’ soured loans surged by a record last quarter, potentially adding pressure on authorities to further ease their deleveraging campaign as the trade war intensifies.

Non-performing loans (NPLs) rose 183 billion yuan (RM109.06 billion) to hit 1.96 trillion yuan by the end of June, the biggest quarterly increase in data going back more than a decade, the China Banking and Insurance Regulatory Commission (CBIRC) said in a statement yesterday. Soured loans represented 1.86% of total advances, the highest ratio since March 2009.

“The NPL data is much worse than we had expected,” said Zhao Yarui, a Shanghai-based analyst at Bank of Communications Co. “Tighter liquidity in the first half has certainly contributed to quick deterioration in banks’ asset quality, along with a stricter policy on bad loan recognition.”

China’s two-year crackdown on its shadow-banking sector has made it harder for weaker borrowers to refinance debt. However, regulators have started tapping the brakes on the deleveraging campaign over recent weeks as the US$12 trillion (RM49.2 trillion) economy slows and US President Donald Trump threatens to slap more tariffs on Chinese goods.

The central bank now wants banks to lend more, and has taken several steps, including easing one of its capital requirements under the so-called macro prudential assessment framework.

Capital adequacy ratios have dipped across China’s banking system in recent years, with dramatic declines at some smaller lenders. Falling stock markets have also made it harder to raise fresh capital. Chinese banks’ overall capital adequacy ratio fell to 13.57% as of June from 13.64% at the end of March.

Part of the surge in soured debt can be explained by the regulator’s recent decision to force lenders to reclassify as non-performing all loans overdue for more than 90 days. The move will lead to a 14% jump in Chinese banks’ bad loans, with most of the impact falling on city and rural commercial lenders, according to analysts at UBS Group AG.

About 80% of the increase in second-quarter bad debt came from rural commercial banks, CBIRC data showed. The industry’s total profits rose by 6.4% in the first half (1H) from the same period a year earlier to reach one trillion yuan, according to the statement.

Chinese banks advanced nine trillion yuan of new loans in the 1H of 2018, an increase of one trillion yuan from a year earlier, according to the central bank.

Meanwhile, Bank of East Asia Ltd (BEA) slumped the most since July 2015 following news it will be cut from Hong Kong’s Hang Seng Index along with China Merchants Port Holdings Co, which also tumbled.

BEA closed down 5.8% yesterday, making it the worst performer on the Hong Kong benchmark, even after paring some earlier losses.

China Merchants Port was the third-worst, dropping the most since February.

The two stocks will be removed from the index on Sept 10 and replaced by Sino Biopharmaceutical Ltd and textiles manufacturer, Shenzhou International Group Holdings Ltd. — Bloomberg