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Underperformance on the rise in China

The rising number of non-performing loans (NPLs) across the Chinese banking sector is linked to the worsening performance of entities, state-owned or otherwise, within the corporate sector. Although China’s four largest lenders have a significant number of NPLs, the government is unlikely to let these entities fail.

Jun 23, 2016 // 5:29PM

According to an IIF report, slowing Chinese economic growth and falling net profits in state-owned enterprises (SOEs) have led to an increase in the number of NPLs across the country’s banking sector.

Figures from Trading Economics show that China’s GDP growth rate has fallen from 7.3% in Q1 2014 to 6.7% in Q1 2016, adding that economic growth is at its weakest level since 2009.

The report noted that the banking sectors’ net profit growth fell from an average of 9.6% in 2014 to 6.3% in Q1 2016.

Falling net profits amongst SOEs have also contributed to the increased number of NPLs across the banking sector. Statistics from the report noted that by the end of March this year, total outstanding NPLs across the banking sector amounted to CNY1.4tn (nearly US$200bn). The ratio of NPLs to total loans increased to 1.75%, up from around 0.95% in 2012.

“External evidence suggests that the rise in NPLs is connected to the default rates from SOEs and corporates,” said Emre Tiftik, Deputy Director of Global Capital Markets at the IIF.

He added that the default rate in the SOE bond universe has also been increasing since the beginning of the year.

The report noted that China’s four largest lenders, Industrial Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC) face heightened pressure from NPLs.

The number of NPLs across these 4 banks increased year-on-year from Q1 2015. Figures from the report showed that ABC faced a higher number of NPLs compared to its peers, which amounted to around 2.375% of total loans, above the average of 1.75%, under which the other 3 main lenders remained.

Despite the rise in NPLs amongst these banks, it is unlikely that they will ever face serious trouble.

“The government will not allow these banks to fail as they increase China’s global exposure,” stated Tiftik, noting that they have a significant political importance.

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