Bad Loans Piling Up

Caijing has the story: Post-Lending Boom Blues for China's Banks
First-half data from regulators shows the banking industry had offered an optimistic picture of decreasing balances and NPL ratios. But the picture seems suspicious. One reason is that the astronomical increase in lending helped decrease NPL ratios.
In the housing bubble, the later year subprime loans became non-performing sooner because they were lower quality. When will the latest loans begin showing up as NPLs?
For example, CCB's report said its NPLs in the first half decreased by 6.67 billion yuan. However, the bank also said it had recovered 19.6 billion yuan from older NPLs in the first half.

Bank of China's interim first-half report said its NPL basket contracted by 10 billion yuan. BOC President Li Lihui said the bank recovered 12.6 billion yuan and wrote off 3.8 billion yuan worth of NPLs.

If other measures such as restructurings, acquisitions and mergers are taken into consideration, it could be said that BOC absorbed a total 22.6 billion yuan in NPLs.
NPLs decreased less than the write-off of old NPLs, i.e. the number of NPLs increased in the first half.
Liao Qiang, a financial analyst at Standard & Poor's, said the overall quality of loan clients worsened while client numbers increased during the loan campaign. Many loan applicants who failed bank criteria tests were approved anyway, Liao said.

A senior analyst from a commercial bank said: "The problems of new loans will not emerge until two years pass. Due to massive levels of capital on the market, many enterprises can still hang on and, therefore, a large outbreak of NPLs will be delayed."

The analyst also said NPLs would have surfaced already if not for the Chinese government's spending this year through a 4 trillion yuan economic stimulus package.

"Governments are playing an important role in supporting many projects," a banking source said. "Without government support, many projects would not sustain themselves with their own capital."
There's the estimate on the NPLs. Immediately without government support, but maybe in two years time. From the numbers above, it's clear that some problems already exist in the loan portfolios, probably due to difficult economic conditions, without even counting the low quality loans made in the past five months. And what about earnings?
CMB and CITIC blamed their poor performances on decreasing interest rate differentials. CMB's differential fell 1.42 percent while CITIC's declined 1 percent, although both were higher than the industry average.

The central bank cut benchmark interest rates five times in 2008. That was followed by a loosening of bank lending limits, lowering loan costs and narrowing the rate gaps between bank borrowing and lending.
Profits are tougher to come by, but more reserves will be necessary to cover growing NPLs.
However, the industry rate differential is not likely to bounce back to the original – and now enviable -- 3.5 percent. According to an analysis by China International Capital Corp. Ltd., listed banks' interest rate differentials, if the benchmark interest rate keeps steady, are expected to increase 8 basis points to 2.43 percent in 2010 and 2 basis points to 2.45 percent in 2011.

And any upward trend would depend on a stable increase in interest revenue from borrowers – a situation that appears difficult considering the change in China's loan climate since June.
Lower profits, higher reserves and growing NPLs. The next wave of stimulus in China, should there be another wave, will not come via the banking system.

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