Special Situations

Chinese Commercial Banks Report Increasing NPL Ratio For The First Time Since Q4 2016

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Non-performing loan (NPL) ratio of Chinese commercial banks rose to 1.75% in the first quarter from 1.74% at the end of 2017, marking the first hike since the fourth quarter of 2016.

The outstanding NPL of commercial banks stood at RMB1.77 trillion (US$279.25 billion), representing a RMB68.5 billion increase compared with the last quarter in 2017, according to data released by China Banking and Insurance Regulatory Commission.

China’s NPL ratio remained steady at 1.74% for the five consecutive quarters since the fourth quarter of 2016 to the fourth quarter 2017, leading some to speculate that China’s bad loan cycle has reached a peak. However, the modest hike in the first quarter imply that the Chinese bad debt issue may still have ways to go.

China Orient Asset Management said in a report that Chinese commercial banks’ bad loans will become more pronounced in 2018 as more bad loan risks will be exposed. In addition, Chinese banks’ NPL ratio may be higher than the reported NPL ratio, as banks in China are known to hide their NPLs via extension and other methods.

"A large amount of credit went to industries with excessive capacity, or even ‘zombie enterprises… all of which pose threats to the quality of credit," said Xiao Yuanqi, head of the prudential regulation bureau of China Banking and Insurance Regulatory Commission, at a press conference in March. "Some banks use fake and inaccurate asset classification, and even hid and transferred non-performing assets."

Corresponding to the increasing NPL ratio is the decreasing capital adequacy ratio of Chinese banks. In the first quarter, Chinese banks’ core tier 1 capital adequacy ratio, tier 1 capital adequacy ratio and capital adequacy ratio was 10.72%, 11.28% and 13.64% respectively, representing a drop of 4 basis point, 7 basis point and 1 basis point year-on-year.

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