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Bad loan ratio to stabilize as economy expected to recover soon
By Janet Sun |
August 20, 2012, Monday
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Print Edition
Print Edition
THE China Banking Regulatory Commission has recently announced second-quarter key regulatory indicators for commercial banks. Overall, the non-performing loan (NPL) ratio for commercial banks was largely flat from the first quarter at 0.9 percent.
The NPL balance has been rising steadily since the fourth quarter of 2011. The NPL balance on substandard loans rose by a larger margin, up 8.8 percent quarter on quarter; as for doubtful/loss loans, the quarter-on-quarter change was 1.3 percent/-0.3 percent. We expect the overall NPL ratio at commercial banks to stabilize gradually in the third and fourth quarters of 2012 as the macroeconomy stabilizes and earnings at non-financial companies improve.
In the short term, we think the banking sector will report stronger interim earnings than the non-financial sector, and the demand for allocation into banks should generate relative returns. However, against the backdrop of interest cuts, the sector climate is falling at a faster rate. There is limited upward elasticity in share prices, and absolute returns are likely to grow slowly only after earnings and valuations have recovered.
In the second quarter, NPLs at small to medium-sized banks in China increased by a larger margin than at the large state-owned banks. Large state-owned banks posted a 0.9 percent quarter-on-quarter increase in the NPL balance, whereas the balance was up 8.1 percent, 12.3 percent, 13.9 percent, 20.8 percent at joint stock banks, city commercial banks, rural commercial banks, foreign banks, respectively.
We think this round of banking asset quality decline was mainly attributable to a certain degree of operational difficulty faced by smaller firms as the economy slowed, particularly in Zhejiang Province, where private sector borrowing is more popular; the major sectors affected include manufacturing, wholesaling, and retailing.
As at end of the second quarter, commercial banks' overall loan loss provisions had risen 5.2 percent quarter on quarter, the provision coverage ratio was up 2.8 percentage points from the first quarter to 290 percent, whereas the provision-to-loss ratio climbed 2 basis points quarter on quarter to 2.61 percent. We think the banking sector's higher provision levels will provide a buffer against asset quality deterioration in the sector.
We think the major downside risks impacting the Chinese banking sector include: 1) downside risk for the macroeconomy and the asset quality risk arising from it; 2) constraints on banks' credit growth, net interest margins, and other parameters due to monetary policy tightening, capital policy, and interest rate liberalization policy; 3) impact on banks' operations from other key industry policies, including those for the real estate sector.
This is a summary of a Chinese research note published by UBS Securities Co Ltd on August 16. The opinions are her own.
The NPL balance has been rising steadily since the fourth quarter of 2011. The NPL balance on substandard loans rose by a larger margin, up 8.8 percent quarter on quarter; as for doubtful/loss loans, the quarter-on-quarter change was 1.3 percent/-0.3 percent. We expect the overall NPL ratio at commercial banks to stabilize gradually in the third and fourth quarters of 2012 as the macroeconomy stabilizes and earnings at non-financial companies improve.
In the short term, we think the banking sector will report stronger interim earnings than the non-financial sector, and the demand for allocation into banks should generate relative returns. However, against the backdrop of interest cuts, the sector climate is falling at a faster rate. There is limited upward elasticity in share prices, and absolute returns are likely to grow slowly only after earnings and valuations have recovered.
In the second quarter, NPLs at small to medium-sized banks in China increased by a larger margin than at the large state-owned banks. Large state-owned banks posted a 0.9 percent quarter-on-quarter increase in the NPL balance, whereas the balance was up 8.1 percent, 12.3 percent, 13.9 percent, 20.8 percent at joint stock banks, city commercial banks, rural commercial banks, foreign banks, respectively.
We think this round of banking asset quality decline was mainly attributable to a certain degree of operational difficulty faced by smaller firms as the economy slowed, particularly in Zhejiang Province, where private sector borrowing is more popular; the major sectors affected include manufacturing, wholesaling, and retailing.
As at end of the second quarter, commercial banks' overall loan loss provisions had risen 5.2 percent quarter on quarter, the provision coverage ratio was up 2.8 percentage points from the first quarter to 290 percent, whereas the provision-to-loss ratio climbed 2 basis points quarter on quarter to 2.61 percent. We think the banking sector's higher provision levels will provide a buffer against asset quality deterioration in the sector.
We think the major downside risks impacting the Chinese banking sector include: 1) downside risk for the macroeconomy and the asset quality risk arising from it; 2) constraints on banks' credit growth, net interest margins, and other parameters due to monetary policy tightening, capital policy, and interest rate liberalization policy; 3) impact on banks' operations from other key industry policies, including those for the real estate sector.
This is a summary of a Chinese research note published by UBS Securities Co Ltd on August 16. The opinions are her own.
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