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Bad loans in China's banking system mount, rise 3.6 per cent in second quarter

Enoch Yiuenoch.yiu@scmp.com

Chinese banks have reported an increase in bad debts and a decline in capital adequacy ratio in the second quarter, as the year-long trade war has hit the country's economy hard.

Total non-performing loans in the mainland's banking system rose to 2.235 trillion yuan (US$316.6 billion) during the three months to June, up 78.1 billion yuan, or 3.6 per cent from the first quarter of this year. The non-performing loan ratio edged up by a marginal 0.01 percentage points to 1.81 per cent during the quarter, according to data posted on the China Banking and Insurance Regulatory Commission's (CBIRC) website on Monday night.

Provision for loan losses rose to 4.26 trillion yuan at the end of June, up 3 per cent from the end of March.

"The increase in loan provisions for the second quarter is not surprising given the dire need of small and medium-sized companies in mainland China to raise capital," said Louis Tse Ming-kwong, managing director of VC Asset Management.

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"The bad-debt ratio increase and decrease in capital adequacy ratio were within market expectation."

The rising bad debts come as China's sovereign wealth fund last Thursday took over HengFeng Bank, the third case in as many months of the state taking over a troubled lender.

While the CBIRC said that the banks' credit quality remains stable, the data showed that the lenders have seen their capital ratio fall along with the economy. China's gross domestic product grew at 6.2 per cent in the June quarter, the slowest quarterly growth rate since 1992.

Chinese banks' core tier 1 capital adequacy ratio " a key measure of a bank's financial strength " declined to 10.71 per cent at the end of June, down 0.23 percentage points from three months earlier.

Banks' liquidity ratio dropped to 55.77 per cent at the end of June, down 1.04 percentage points from the previous three months.

However, it was not all bad news. The net profit of banks in the first half stood at 1.13 trillion yuan, up 6.5 per cent from a year earlier, while total assets rose 8.2 per cent year on year to 281.58 trillion yuan.

Tse said that looking ahead, the escalating US-China trade war and the recent devaluation of yuan to below 7 against the US dollar will hamper the banking sector further in the second half of this year.

"The outlook for the Chinese banks remains cautious as the overall bad loan level of about 300 per cent of GDP, though high, is still manageable."

A lion guards the gates of the China Banking and Insurance Regulatory Commission. Photo: CCTV.com alt=A lion guards the gates of the China Banking and Insurance Regulatory Commission. Photo: CCTV.com

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.