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New credit to beat US$146b but banks may see bad loans

By Zhang Fengming | February 5, 2009, Thursday | Print Edition

ANALYSTS expect new credit that was launched last month to surpass 1 trillion yuan (US$146.4 billion) but are divided on whether the sizzling rise in lending will improve banks' balance sheet.

Zhu Yan, a CITIC Securities Co banking analyst, said the new credit last month may top 1 trillion yuan and the strong growth of credit will improve listed banks' profits by countering the narrower interest rate margin.

The People's Bank of China is due to release last month's credit data in the middle of this month. Premier Wen Jiabao said on his recent visit to Europe that a monthly record of 900 billion yuan of loans had been added during the first 20 days of last month.

Zhu said banks can improve their profits with the strong growth in credit, with big state-owned banks and city commercial banks to post a profit growth of about 5 percent in the first quarter while joint stake banks may face a negative growth of 10 percent in the first quarter.

Zhu said the ample liquidity and high credit growth, helped by a government stimulus, will offset the industry's worsening assets.

"The credit growth can thrust corporate business and ease the pressure for businesses to collapse due to the lack of capital. It cuts the likelihood that outstanding loans will worsen," Zhu said. "On the other front, banks can also benefit from the economies of scale with growing credit as their interest margin is decreasing.

The central bank has trimmed interest rates five times last year to trim corporate lending costs but the cut ate into Chinese banks' main income source from interest.

However, some analysts cautioned that the sizzling credit expansion may create more bad loan exposure in the long term.

"Banks shore up the credit growth as they swarmed to offer loans to government-driven infrastructure projects, which will slow down in the second half," China International Capital Corp said in a report yesterday. "Credit growth from private sector may still be lackluster this year."

"The explosive credit growth may be good news for construction or related industries but is not so beneficial to banks in the long run. Banks are facing bad loan exposure amid the imbalance of investment and consumption," the report said.

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