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Defaults surge on bank loans in China

RECORD RISE:The number of bad loans rose by the most in a quarter since 2005, with nonperforming loans worth 646 billion yuan in the January to March period

Bloomberg

Chinese banks had the biggest quarterly increase in bad loans since 2005 as a slowdown in the world’s second-largest economy causes defaults to rise.

Nonperforming loans rose by 54 billion yuan (US$8.7 billion) in the three months through March to 646.1 billion yuan, the highest level since September 2008, according to data released by the China Banking Regulatory Commission (CBRC) yesterday. Bad loans accounted for 1.04 percent of total lending, up from 1 percent three months earlier.

The 10th straight quarterly increase in defaults adds to concern that banks’ profitability may slip as they build buffers to cover loan losses. Policymakers have also been cracking down on financing to weaker borrowers to rein in total debt, which has climbed to more than double the nation’s GDP.

“Asset quality is now the biggest overhang on the banking sector... The [Chinese] government’s reluctance to use stimulus and ease monetary policy has made it difficult for many borrowers to repay debt,” Shanghai-based Masterlink Securities Corp analyst Rainy Yuan said by telephone.

Concern that profitability will decline further dragged the Hong Kong shares of China’s five biggest banks down by an average 7.3 percent this year to Thursday, compared with the benchmark Hong Kong’s Hang Seng Index’s 2.5 percent drop. The lenders traded at an average 4.8 times estimated 2014 profit, close to the lowest valuations on record.

Combined net income at China’s banks rose 16 percent to 427.6 billion yuan in the first quarter from a year earlier, CBRC data show. Their net interest margin, a key measure of lending profitability, fell to 2.58 percent as of March from 2.68 percent in December.

Lending in China is slowing as the government discourages credit to overextended industries and local governments as it cracks down on activity outside the formal banking system.

The nation’s broadest measure of new credit shrank 9 percent in the first quarter, and money supply in March grew at the slowest pace on record, underscoring risks of a deeper slowdown.

China’s economy expanded 7.4 percent in the first quarter, the slowest in 18 months. Growth of 7.3 percent is forecast for this year, the weakest pace since 1990, based on the median estimate in a survey of economists.

The economic slowdown has hurt borrowers’ ability to repay debt and driven defaults higher. The five biggest lenders had 377.1 billion yuan of nonperforming loans at the end of March, an increase of 8 percent from the beginning of the year, a separate CBRC statement on Thursday showed.

Chinese banks had 1.8 trillion yuan of loan-loss reserves at the end of March, accounting for 274 percent of their nonperforming loans, according to the regulator. That fell from 282.7 percent as of December.

Shanghai Chaori Solar Energy Science & Technology Co (超日太陽能) in March became the first Chinese company to default on onshore bonds when it failed to make a full coupon payment.

China averted its first trust default in at least a decade in January as investors in a 3 billion yuan product distributed by International Commercial Bank of China Ltd (ICBC, 中國工商銀行) were bailed out days before it matured.

The government has spent more than US$650 billion bailing out banks by carving out bad loans and injecting capital since the late 1990s, after years of government-directed lending caused default risk to balloon. In 2005, the nonperforming loan ratio at state-owned banks stood at 15 percent.

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