Chinese Banks' Loan Growth Not Sustainable, Says Moody's

The strong loan growth announced by my most large Chinese banks in their interim results is raising concerns over asset quality and capital constraints. According to Moody’s, the creditworthiness of Chinese banks would come under pressure if the trend continues.


Moody’s predicts that Chinese banks’ loan growth would slow to about 10% to 15% in 2010. However, if China’s economic growth is much weaker than expected, prompting a second government stimulus program, then another year of very strong loan growth for Chinese banks is expected, says Moody’s.  “This will certainly add to our concerns over Chinese banks’ asset quality and creditworthiness, especially given that the regulator may need to relax requirements to allow banks to pursue more loans,” states Leoh Wah, senior analyst at Moody’s.


According to Wah, Chinese banks’ total loans grew 30.3% year-on-year and 24.2% over the first half of 2009. The net increase in loans amounted to an astonishing RMB7.8 trillion, far exceeding the People’s Bank of China’s original target of RMB5 trillion for the whole year, which was reached just four months into 2009.


Moody’s says that strong loan growth was mainly attributable to the Chinese government’s economic stimulus program, which prompted banks to lend more. While Chinese banks have claimed that they maintained credit standards in the first half of 2009, it is more likely that there was some loosening of standards.  “This raises concerns over local banks’ loan quality, although we do not expect substantial deterioration in the short term, mainly because China’s solid economic growth and sufficient market liquidity may offset weaker credit control for some time,” says Wah, adding that it usually takes some time for new loans to become non-performing, but he estimates that more than 90% of Chinese banks’ NPLs were granted before 2007.


In the near term, Moody’s expects growth in bank loans to slow down significantly, at least in the second half of 2009. The net increase in loans is expected to average about RMB380 billion a month in July and August 2009, sharply lower than the monthly average of RMB1,300 billion in the first half of the year.


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