MNI EXCLUSIVE: Fragile China Lenders May Be Bank Sector Threat

--Small Banks Non-performing Loans Likely To Rise Further

     BEIJING (MNI) - China's banking sector is vulnerable to growing risks from

smaller regional banks with deteriorating credit standings due to mounting bad

debts, poor risk control and tougher regulations, multiple sources told MNI.

     "The non-performing loan (NPL) ratio of the entire banking sector showed a

rising momentum this year, largely due to the jump of that in some small and

medium-sized lenders," Zeng Gang, head of the banking research institute at the

Chinese Academy of Social Sciences, a leading advisory institute to the central

government, told MNI.

     A rising number of small regional banks are suffering from the surge in

NPLs this year. As these lenders play vital roles supporting the local economy

and small businesses, their difficulties could undermine China's effort to

rejuvenate growth and restructure struggling industries.

     "Small banks are more fragile, particularly under the supply-side reform

and industrial structural campaign," said Zeng. Loans from small banks went

mainly to local industries, so their bad assets would balloon as the government

closes so-called zombie firms.

     China's campaign for stricter financial regulations contributed to regional

lenders' difficulties. The banking regulator has forced banks to adopt stricter

standards on NPLs, which directly boosts the ratio, Zeng said. 

     --BAD LOANS SURGE

     "The surge in bad loans directly results from stricter regulation which

forced some lenders to unveil some hidden bad loans," a government source

familiar with the situation told MNI. 

     In addition, the tough economic environment faced by small businesses also

reduced small lenders' assets quality, the source said.

     The NPL ratio of rural commercial banks (RCB) spiked to 3.26% in the first

quarter, up from 3.16% at the end of 2017, or 2.49% in 2016, according to data

given by the China Banking and Insurance Regulatory Commission (CBRIC). The

ratio for the entire banking sector in Q1 was 1.75%.

     Some of the cases of wider and deeper credit risks facing RCBs showed up in

this month's release of their 2017 annual reports. A Shanxi-based RCB from Houma

region said its NPL ratio surged to 26.28% at end-2017, more than five times the

5% regulatory standard, attributing the surge to a slow economy and unpaid

loans. 

     --CREDIT DOWNGRADES

     An RCB in Guiyang, the capital of Guizhou province, said its NPL ratio

jumped to 19.54% at the end of last year from 4.13% in 2016. Henan-based Wuxiu

RCB with NPLR rising to 20.74% from 4.5% in 2016.

     According to published data, at least 15 RCBs had NPL ratios above 5% in

2017. Additionally, at least five RCB were downgraded by credit agencies this

year, a record for the industry. Two small lenders' saw applications for public

listing suspended by security regulators in July.

     Small banks' operations face greater obstacles given higher NPL ratios,

falling profits and lower risk control capabilities, according to Zeng. 

     --GOVERNMENT TIES

     "Small banks are connected to local governments, so they sometimes have to

cede controls to politics. Therefore, moral hazard and management capacity are

both problematic," added the government source. Risks also tend to grow in a

period of economic slowdown, the source said.

     Although policymakers are boosting support to small businesses through the

provision of additional credit quotas, regional banks may not benefit.

     "Given limited risk control capacity, regional banks are risk-averse to

lending to small businesses, particularly in a situation where you have rising

cases of defaults," the source noted.

     "Structural reform is a long-term strategy, so regional economic situations

won't improve soon, even with new stimulus policies," he added.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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