MNI EXCLUSIVE: China’s Big Banks To See More Bad Loans

China's big national banks will face a rise in bad loans and greater pressure to sell distressed debt this year due to the overhang from the massive covid-driven lending spree and defaults that are likely as credit tightens, policy advisors told MNI.

Six Chinese banks, including Industrial and Commercial Bank (ICBC) of China, Bank of China, China Construction Bank and Agricultural Bank of China, slowed efforts to write down the value of their assets and classified fewer loans as non-performing in Q4 to show profits for the full year, advisors said. Asset impairment losses for the six grew 13% y/y in 2020 after rising as high as 47% in the first half, according to data from the banks' financial reports.

But the approach of banks is shifting with regulators urging a faster cleanup in line with the policy drive to contain financial risks. In a change from last year, Agricultural Bank of China now classifies loans as non-performing when they are overdue for just 20 days as against the 60 days that is the industry standard. The shift is extreme and puts borrowers in a bind, said a senior employee of a big bank who wanted to remain anonymous. The regulatory requirement is 90 days.

The average bad loan ratio of the six banks is 1.45%, according to annual reports released last week, 13 bps higher than at the end of last year.

DISPOSALS

"Bad loans will continue to mount as part of the lending from last year will turn sour," said Dong Ximiao, the chief analyst at Merchants Union Consumer Finance. Asset quality receded in importance following the pandemic as the government exhorted banks to help companies with cheap loans to aid the recovery.

"Lower provisions in Q4 can't be sustained," said Wang Yifeng, the chief banking analyst with Everbright Securities. Advisors expect banks will continue to deal with distressed debt and record losses to comply with directives. Guo Shuqing, the chairman of China Banking and Insurance Regulatory Committee, said recently that banks will be asked to maintain last year's pace of bad loan disposals. Wang sees bad loan disposals totalling at least CNY3 trillion this year, matching last year's amount.

Despite the improving economy, defaults by local state-owned enterprises, lower-quality real estate developers, and companies with overcapacity are likely this year, Wang said. The central government remains hawkish about lending to the real estate sector, and has tightened loan criteria as well as screening and monitoring of lenders and recipients to prevent asset bubbles. Meanwhile, State-owned Assets Supervision and Administration Commission of the State Council, the SOE supervisor, has asked heavily indebted firms to lower leverage ratios to a reasonable level as soon as possible.

Another potential source of new bad loans is small and medium enterprises, although the amounts may not be large as SMEs account for just about 5% of the assets of national banks. Last year, the big banks deferred repayment on CNY6.6 trillion worth of SME loans. While the government has extended the deferment program by another nine months to year end, 5% to 10% of deferred loans could become non-performing later this year, China Securities said.