Chinese Banks Saw Value of Bad Loans Rise Last Year, Annual Reports Show

Bad loans have sharply increased for many banks as more companies struggle to make repayments, data from recent bank annual reports show.

The total value of non-performing loans at 12 major banks was 467 billion yuan on December 31, an increase of 76.3 billion yuan, or 19.5 percent, from the beginning of 2013.

Earlier data from the regulator shows the entire banking industry’s bad loans increased by 99.2 billion yuan last year to 592.1 billion yuan, with the average non-performing loan ratio reaching 1 percent, compared with the 0.95 percent a year earlier.

The total amount of bad loans may have increased by another 60 billion yuan in the first two months of this year, an executive of a large bank said.

More are expected to emerge in the second quarter, he said. The regulator has issued a notice to its regional offices and major financial institutions that requires them not to hide toxic assets or be in a hurry to call in loans thus forcing more borrowers into liquidity problems, bankers with knowledge of the requirements said.

“Bad loans in general are showing signs of spreading and contagion,” a senior banking analyst said. “In 2012, they were concentrated in relatively small industries such as trading companies. The next year they spread to big ones and big enterprises.”

Among the defaulters were subsidiaries of big state-owned enterprises (SOEs), which banks normally view as safe clients, a loan officer at a joint-stock bank said. In many cases, he added, the parent SOEs did not save their subsidiaries mostly because they were in deep trouble themselves.

Data from the China Iron and Steel Association, a trade organization, shows that the debt-to-asset ratios of many of country’s major steel-producing and trading companies, most of them SOEs, have passed the 70 percent red line.

The association’s data also shows that at the end of last year the top 86 steel manufacturers and traders in the country owed banks 1.33 trillion yuan and other creditors another 1.76 trillion yuan.

There is no consensus about the value of the loans that cannot be repaid. A source close to the banking regulator said it was 1.5 trillion yuan, with large SOEs especially indebted.

Coal miners are also struggling. The industry’s average debt-to-asset ratio at the end of last year was more than 64 percent, data from trade group China National Coal Association shows. The organization also says that the large colliers, mostly SOEs, lost a combined 40.6 billion yuan in the first 11 months of 2013, up nearly 81 percent from the same period the previous year.

Experts attributed the woes of many coal miners and steel companies as much to the slowing economy as to their unwise investments in other fields. It has been reported that many steel traders ran into trouble because they used banks to trade stocks and invest in properties in hopes of making quick cash.

The current size of bad loans is still controllable, but it is set to rise and certain sectors will face more pressure than others, said Zeng Gang, director of the Banking Research Office at the Chinese Academy of Social Sciences.

The non-performing loan ratio of some small banks in the Yangtze River Delta, Pearl River Delta and the coastal regions near the Bohai Sea in the northeast has reached up to 4 percent, he said.

Several bank executives have said their bad loans came primarily from the two delta regions. Sun Deshun, vice president of China Citic Bank, said 68 percent of the bank’s bad loans were in the Yangtze River Delta.

Song Xianping, director of risk management at the Agricultural Bank of China (ABC), said companies in Wenzhou, an entrepreneurial hub in the Yangtze River Delta, were among the most heavily indebted.

At the end of 2013, the non-performing loan ratio of financial institutions in Zhejiang Province, in the Yangtze River Delta, was 1.84 percent, data from the provincial banking regulator shows. The figure for Wenzhou was 4.41 percent.

To cope with increased bad loans, many lenders have turned to write-offs and transfers. The 12 major banks’ annual reports show that they wrote off and sold 102 billion yuan worth of bad loans last year, up 206 percent. Of that, the Big Five state-owned banks wrote off and sold loans worth 64.7 billion yuan, up 159 percent.

Some of the bad loans were sold to asset management companies. Zang Jingfan, president of China Cinda Asset Management Co. Ltd. said earlier that there are abundant opportunities to acquire bad loans in “areas of excessive production capacity, industries of environmental protection that need to be upgraded, steel trade and cement production, and the real estate sector.”

Cinda is one of the four asset management companies (AMCs) established in 1999 to take over bad loans from big state-owned banks. The other three are China Oriental Asset Management Corp., Huarong Asset Management Co. and Greatwall Asset Management Corp.

Some local governments have also set up or are about to establish their own AMCs to dispose of bad loans.

ABC’s Song said the bank sold a series of bad loans to AMCs last year for 35 percent of their book value, or 4.1 billion yuan.

“So far the strategy has worked well,” he said. “But big banks cannot rely entirely on transfers to dispose of bad loans.

“More importantly, we must control the formation of bad loans from the source, or otherwise it will be difficult to fix the problem no matter what methods we use downstream.”

 

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