Non-performing Loan Ratio at Top Chinese Banks Under Pressure

There has been an increase in the number of non-performing loans (NPLs) and the NPL ratios of China’s top 10 listed banks.


PwC’s  Analysis of China’s Top 10 Listed Banks Results for First Half of 2013 reveals that the total  NPLs of these banks was RMB411.7 billion at the end of June 2013, an increase of 9.43% or RMB 35.5 billon compared with the NPLs six months ago.


While the average NPL ratio increased to 0.95% by 0.02%. Most banks had put in more efforts in debt collection and expedited write-offs in the first half year of 2013 in order to relieve pressure on their asset quality.


The total overdue loans outstanding in the top 10 listed banks was RMB585.8 billion at end of June 2013, an increase of 20.42% compared with that at the end of 2012.


The overdue loan ratio continued to rise from 1.21% at the end of 2012 to 1.35% at the end of June. The increase in the overdue loan ratio indicates that more NPLs may emerge in the future.


The total assets of the top 10 listed banks amounted to RMB84.48 trillion at the end of June 2013, up 7.36% when compared to six months prior.


The growth rate has continued to fall since 2010. The top 10 listed banks generated a total net profit of RMB 581.6 billion in the first half of 2013, up 13.35% from the same period in 2012. The pace of growth is slower than the 17% recorded in the first half of 2012.


“Further interest rate liberalisation intensifies competition among the banks which in turn exerts more pressure on their profitability,” says Raymond Yung, PwC Financial Services Leader for China.


PwC’s analysis further reveals that the loan volume continued to expand in the first half of 2013, with a slight increase in the principal lending rates.


From the geographical distribution of credit assets, the Yangtze River Delta region has the highest concentration in loans among the top 10 listed banks, accounting for about one-quarter of the total.



The top five industries that accounted for the largest proportion of loan from the top 10 listed banks are manufacturing; communication, transportation, storage and postal; wholesale and retail; real estate; and lease and commercial services. Loans to these five industries accounted for 70.56% of the total loans granted. 


In the first half of 2013, the top 10 listed banks generated a total interest income of RMB1.77 trillion, with a period-on-period growth rate at 6.57% only.This is substantially lower than the rate of 33.72% recorded in the same period last year. This slowdown was mainly due to cuts in interest rates by the central bank.


Returns on interest-earning assets disclosed by eight out of the top 10 listed banks for the first half of 2013 unanimously experienced a decline. The fall was mainly due to lower returns on loans during this period compared with the same period in 2012.


Income derived from investment securities increased most significantly in the first half of 2013, followed by interbank deposits and placements. The change in interest income composition to a certain extent reflects the further development of innovative products and interbank businesses.


In the first half of 2013, investment in the beneficial rights of trust schemes grew rapidly. They are proprietary investments made by banks in the trust schemes managed by their peers.  


The proportion of investments in available-for-sale and held-to-maturity financial assets held by joint stock commercial banks fell substantially. However, the proportion of investments classified as loans and receivables rose significantly, reflecting the increase in investment in trust schemes, asset management plans and wealth management products. This change indicates that these banks were more active in the innovative interbank businesses.


Since 1 January 2013, Chinese banks have officially implemented The Measures for Capital Management for Commercial Banks (Trial) (new regulation).


The new regulation classifies counterparty credit value adjustments and operational risks under the scope of risk-weighted assets and defines stricter criteria for the evaluation of credit assets. As a result, the capital adequacy ratio calculated under the new regulation in the first half of 2013 for the top 10 listed banks was lower than that derived from the previous regulation.


“The new regulation has brought pressure on banks for additional capital. In addition to reducing capital consumption with low returns, several listed banks have already announced their plans on the issuance of supplementary capital instruments. It is crucial for banks to enhance their competitiveness by adjusting their business structures under the new regulatory environment, reducing capital consumption and exploring new capital instruments,” says Yung.


The full deregulation of lending rates became effective on 20 July 2013, demonstrating China’s interest rate liberalisation reform has entered into a new stage. Banks can now determine their lending rates according to the business circumstances.


“The liberalisation of interest rates also demands for a higher level of banks’ competence in asset and liability management, and interest risk management. Both the current management models and the interest rate gap management tools need to be re-tailored to cope with the dynamic changes in assets and liabilities, so that the banks can effectively manage the interest rate gap and structural risks, ” says Jimmy Leung, PwC Banking and Capital Markets Leader for China.


“Banks also need to improve their pricing capabilities and optimise their risk management competence, thereby getting ready for the final phase of the liberalisation in deposit rates,” adds Leung.


“Although China’s economic growth is slowing down, the asset quality and profitability of Chinese banks are relatively healthy after a series of reform in the banking industry and the preliminary market competition. Further financial reform may require more effective resource allocation, and risk diversification, which may also benefit the whole of the Chinese economy. The key to survival under this complex environment is simply to ‘tackle it proactively through innovation and sound risk management’. We believe that the Chinese banking industry will certainly continue to transform and develop into world-class standards,” says Yung.

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