MNI EXCLUSIVE: China Banks Face NPL Jump As Loan Holidays End

China's banks face a jump in non-performing loans next year as pandemic emergency measures allowing small business borrowers to defer loan payments expire, policy advisors told MNI, adding that lenders should make provisions and boost capital to avoid running into trouble in 2021.

The second or third quarter of 2021 could be tough for the financial sector, after payment holidays for interest and principle come to an end in March, a source advising banking regulators told MNI, adding that long-term pressure on asset quality will continue as the economy recovers only sluggishly from the Covid-19 shock.

While published data is sometimes unreliable, the advisor said some rural commercial banks already face nonperforming loan ratios of more than 20%. In March, UBS calculated bad debts could increase to CNY5.2 trillion in two years in a worst-case scenario, almost twice today's official figure.

Banks will have to write off as much as CNY3.4 trillion in nonperforming loans in 2020, up from CNY2.3 trillion in 2019, according to the China Banking and Insurance Regulatory Commission's head Guo Shuqing earlier this year. As of the end of June, outstanding NPLs totalled CNY2.74 trillion, taking the NPL ratio to 1.94%. While the ratio was little changed from Q1, 18 of 36 A-share listed banks reported increases in mid-year reports, including all six big state-owned lenders, according to data provider Wind.

SECURITISATION

With tools such as pooling loans for sale as asset-backed securities or making debt-for-equity swaps still little used in China, banks will have to move soon to build capital and increase provisions, another advisor said. Rapid retail loan growth over the past two years has also stored up problems, although default pressure could ease by the second half of 2021, he added.

Consumer defaults, on loans such as credit card debt, are also increasing, the manager of a joint-stock bank on China's east coast told MNI. This adds to pressures building from officially-backed pandemic loan payment holidays. The manager's bank has already significantly increased provisions, hitting profits.

Overdue credit card loans totaled CNY91.9 billion at end-March, up almost 24% from December, according to the People's Bank of China.

While data on bad loans may be incomplete, banks' reported provision coverage ratios are high, at over 140% for 36 A-share listed banks as of end June, with 26 reporting ratios of over 200%, according to Wind. The average ratio for the banking sector as a whole was 182% in H1.

But lenders are facing challenge to raise additional capital, with excess supply of perpetual bonds and weak demand, the second advisor said. Deteriorating loan books also make it more difficult for smaller banks to attract new shareholders.

SLOW PROGRESS

Approval has been granted to 57 asset management companies to acquire delinquent debt, and the top five state-owned banks have set up investment arms to focus on debt-to-equity swaps. But, while the second policy advisor said this trend was positive, he noted progress has been slow. Of CNY405.5 billion in loans written off in Q1, only CNY27.9 billion involved such tools, according to CBIRC.

Asset management companies' capacity lags the volume of bad loans, the first advisor said, adding that they require additional funding from local governments, themselves facing revenue shortfalls and high debt levels. Taxes and fees for securitising and disposing of debt also push up costs, he said. When banks do securitise debt, they struggle to agree prices with asset managers, he added.

Inflated asset prices make it harder to price loans competitively, the head of a southern city commercial bank told MNI. The lingering shock of the pandemic and questions over whether exporters will be able to redirect production to the domestic market under the government's new "dual circulation" strategy are also affecting demand, he said.

At the same time, debt-to-equity swaps are unlikely to be more than a supplement to other methods of cleaning balance sheets, due to their demands on banks' capital and because they are mainly suitable for companies suffering only temporary difficulties, Bank of China research head Zong Liang told MNI.

As a result, banks are becoming more cautious about providing loans, particularly to sectors hit hard by the pandemic, such as restaurants, hotels and manufacturers, the east coast bank manager said.

Borrowers from economically-lagging, heavily indebted regions, such as China's northeast and southwest, are also facing more stringent requirements, the manager said.