China’s bad debts are on the rise. Reuters analyst explains why this is a good news.
Over the last six months of 2014, Agricultural Bank of China registered a 28 percent increase in bad
loans, as its earnings rose a measly 2
percent year-on-year.
The rise in distress signals at the giant lender looks modest compared with what is going on with its smaller peers. However, as Chinese banks start to disclose full-year numbers, this may be a sign of some welcome honesty.
Worsening credit quality is revealed in three ways at Chinese banks.
Loans classed as “non-performing”
increased faster than performing ones at Agricultural Bank, China Citic
Bank, China Merchants Bank, and local lender Bank of Chongqing.
Overdue
loans, an earlier warning signal, have ballooned an average 57 percent
at the four banks since June.
“Special mention” loans – a slang for the borrowers who keep bankers awake at night – expanded 79 percent at Citic Bank, and more than doubled at Bank of Chongqing.
Rising bad debts shouldn’t be a
huge surprise, as China's economy is worsening.
Manufacturers and “retail and wholesale” borrowers, including many commodities traders, are among the fastest rising delinquents, though for now the numbers in total remain small. Agricultural Bank’s bad loan ratio is 1.5 percent, just a shade over the national figure of 1.3 percent at the end of 2014. Bank of Chongqing’s is still just 0.7 percent.
Bad debt is bearly to be welcomed – but coming clean is. Incredulity over China’s bad loan numbers partly explains why Hong-Kong listed Chinese lenders are priced by the market at no more than their book value, despite returns on equity of around 20 percent.
The economic deceleration, which China’s leaders have hailed as a “new
normal,” may be giving lenders cover to deliver some bad news.
Agricultural Bank, for instance, wrote off 29 billion yuan of loans in 2014, triple the amount of the previous year. It’s no big bath, but every bit of added candour helps the integrity of Chinese banks’ valuations.
