High loan figure a concern
By Zhang Fengming |
July 6, 2011, Wednesday
|
Print Edition
Print Edition
Chinese banks' exposure to local government financing arms may be understated by 3.5 trillion yuan (US$540 billion), Moody's Investors Service said yesterday, as the rating firm views the credit outlook for the Chinese banking system as potentially turning to negative.
"Banks' exposure to local government borrowers is greater than we anticipated," Moody's Vice President Yvonne Zhang said.
Unless China comes up with a "clear master plan" to clean up the problem, the credit outlook for Chinese banks could turn negative, Moody's said.
Moody's announcement came a week after the National Audit Office revealed 10.7 trillion yuan of local government debt, with 8.5 trillion yuan - 80 percent - of this debt funded by banks.
But Moody's has identified the potential 3.5 trillion yuan in loans, which the Chinese auditors did not discuss in their report, by comparing the findings in the audit authority's report with reports from Chinese banking regulators.
"Based on our assessment of the loan classifications and risk characteristics, as provided by the NAO and other Chinese agencies, we conclude that the banks' exposure to local government borrowers is greater than we anticipated," said Zhang.
"Since these loans to local governments are not covered by the audit authority report, this means they are not considered by the audit agency as real claims on local governments," said Zhang. "This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency."
Moody's generally expects the Chinese authorities to implement gradual discipline. This would involve the authorities leaving the banks to manage a portion of the problem loans on their own.
It said a jump in local government loan defaults could push the non-performing loan ratio for Chinese banks as high as 12 percent, well above its base-case scenario that envisions losses in the range of 5 percent to 8 percent.
Banks' official bad loan ratio sat at 1.15 percent or 364.6 billion yuan at the end of 2010, according to the China Banking Regulatory Commission.
China's mountain of local government debt has long been seen as a major risk by investors. The worry is that slower growth of the country's economy could set off a wave of loan defaults and hobble its banking system.
Bank shares fell on Moody's report. Domestically listed banks tumbled, dragging down the Shanghai Composite Index that inched up 0.13 percent to 2,816.36.
"Banks' exposure to local government borrowers is greater than we anticipated," Moody's Vice President Yvonne Zhang said.
Unless China comes up with a "clear master plan" to clean up the problem, the credit outlook for Chinese banks could turn negative, Moody's said.
Moody's announcement came a week after the National Audit Office revealed 10.7 trillion yuan of local government debt, with 8.5 trillion yuan - 80 percent - of this debt funded by banks.
But Moody's has identified the potential 3.5 trillion yuan in loans, which the Chinese auditors did not discuss in their report, by comparing the findings in the audit authority's report with reports from Chinese banking regulators.
"Based on our assessment of the loan classifications and risk characteristics, as provided by the NAO and other Chinese agencies, we conclude that the banks' exposure to local government borrowers is greater than we anticipated," said Zhang.
"Since these loans to local governments are not covered by the audit authority report, this means they are not considered by the audit agency as real claims on local governments," said Zhang. "This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency."
Moody's generally expects the Chinese authorities to implement gradual discipline. This would involve the authorities leaving the banks to manage a portion of the problem loans on their own.
It said a jump in local government loan defaults could push the non-performing loan ratio for Chinese banks as high as 12 percent, well above its base-case scenario that envisions losses in the range of 5 percent to 8 percent.
Banks' official bad loan ratio sat at 1.15 percent or 364.6 billion yuan at the end of 2010, according to the China Banking Regulatory Commission.
China's mountain of local government debt has long been seen as a major risk by investors. The worry is that slower growth of the country's economy could set off a wave of loan defaults and hobble its banking system.
Bank shares fell on Moody's report. Domestically listed banks tumbled, dragging down the Shanghai Composite Index that inched up 0.13 percent to 2,816.36.
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