China’s banking sector is facing a rising tide of bad loans as the country’s economic slowdown and the impact of the COVID-19 pandemic take a toll on consumer credit. The four largest state-owned banks have increased their provisions for potential losses, while smaller lenders are selling off their distressed assets to cope with the pressure.
Bad loan ratio hits highest level since 2009
According to the China Banking and Insurance Regulatory Commission (CBIRC), the non-performing loan (NPL) ratio for the banking sector reached 1.86 percent by the end of the June quarter, the highest since 2009. Bad loans spiked 183 billion yuan ($26.62 billion), the biggest quarterly jump since the regulator began publishing data in 2003.
The rise in bad loans was mainly driven by the deterioration of consumer credit, especially credit cards and personal loans, which have been hit hard by the pandemic and the sluggish consumption. The NPL ratio for consumer loans rose to 2.14 percent in the second quarter, up from 1.92 percent in the first quarter.
The CBIRC has urged banks to step up their efforts to dispose of bad loans and improve their risk management. It has also encouraged banks to use various channels, such as debt-to-equity swaps, asset securitization, and debt restructuring, to reduce their NPLs.
Big four banks boost provisions amid property woes
The four largest state-owned banks, namely Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), and Bank of China (BOC), have reported modest profit growth in the first half of 2023, thanks to prudent provisioning against potential bad loans. Their combined net profit rose by 5.6 percent year-on-year to 606.7 billion yuan ($88.4 billion).
The big four banks have also increased their provision coverage ratio, which measures the funds they set aside to cover potential losses from bad loans, to an average of 249 percent, well above the regulatory requirement of 150 percent. This reflects their cautious outlook on the asset quality, especially in the property sector, where some of the biggest developers have defaulted on their debts and faced liquidity crunches.
The big four banks have reduced their exposure to the property sector, which accounted for 22.4 percent of their total loans by the end of June, down from 23.1 percent a year ago. They have also tightened their lending standards and enhanced their monitoring of the developers’ cash flows and project progress.
Small and medium-sized banks sell off bad loans to survive
While the big four banks have sufficient capital and reserves to withstand the bad loan shock, the smaller and medium-sized banks are more vulnerable and under pressure to sell off their bad loans to survive. According to a report by China Chengxin International Credit Rating, a rating agency, the smaller banks sold 1.25 trillion yuan ($182 billion) of bad loans in the first half of 2023, up 41 percent year-on-year.
The buyers of these bad loans are mainly the four state-owned asset management companies (AMCs), namely China Huarong Asset Management, China Cinda Asset Management, China Orient Asset Management, and China Great Wall Asset Management, which were set up in 1999 to deal with the bad debt problem of the big four banks. The AMCs have expanded their business scope and acquired bad loans from various sources, such as local governments, state-owned enterprises, and private firms.
The AMCs have also diversified their disposal methods, such as debt recovery, debt restructuring, debt-to-equity swaps, asset securitization, and asset auctions. However, the AMCs face their own challenges, such as the lack of transparency, the low recovery rate, and the regulatory uncertainty. The case of Huarong, which has been embroiled in a corruption scandal and a debt crisis, has raised doubts about the financial stability and credibility of the AMCs.
