China’s High Loan-to-Deposit Ratio a Warning Sign

China’s adjusted loan-to-deposit ratio climbed to 80 percent as of June 30, according to S&P Global Ratings, noting that for some smaller banks, the ratio has already topped 100 percent, S&P estimates, reports Bloomberg.

If the ratio is too high, it means that banks may not have enough liquidity to cover any unforeseen fund requirements, and conversely, if the ratio is too low, banks may not be earning as much as it could be.

S&P’s adjusted measure is rising much faster than the official loan-to-deposit ratio as banks pile into off-balance sheet lending, sidestepping government efforts to rein in credit, reports Bloomberg. At the current pace, overall credit could surpass deposits on an adjusted basis within a few years.

Bloomberg explains that S&P’s adjusted ratio treats all loan-like assets and corporate bond investments on banks’ balance sheets, as well as corporate credit made off-balance sheet, as loans. On the other side of the equation, it added wealth management products to deposits.

For 20 years, China limited loans to a maximum 75 percent of deposits as part of measures to contain risks. The cap was abolished in October 2015. The official loan-to-deposit ratio among Chinese lenders stood at 67 percent at the end of September, up only slightly from 66 percent when the cap was lifted, reports Bloomberg.

Citing S&P, Bloomberg reports that some banks are already nearing danger territory. Bank of Jinzhou Co.’s adjusted loan-to-deposit ratio stood at 153 percent at the end of 2015 and the lender got 43 percent of its funding from interbank borrowings last year, S&P estimates. At mid-sized Industrial Bank Co., the broadly adjusted ratio was 115 percent while 39 percent of its funding came from the interbank market. 


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