Chinese bankers admit the NPL situation is dire, but will keep on lending

Published: 2016/01/22 19:45 HKT 

Overseas analysts suspect China’s commercial banks are hiding the true state of non-performing loans, and now it seems Chinese media is questioning the same, with talk of banks entering an era of ‘zero profits’.

According to key risk indicators on the CBRC website, official NPL ratios rose from 1.39% in the first quarter of 2015, to 1.59% by the end of Q3. Tellingly, special mention loans, loans where the borrower faces temporary difficulty in making loan repayments but are not classified as non-performing, reached 3.77% by Q3 end.

The official data raising suspicions Chinese banks are reluctant to classify loans as non-performing, due to the additional provision requirments and negative impact on P&L.

Some overseas analysts believe actual NPL ratios might be closer to 10%, sentiments supported by revelations in this article, where Chinese bankers complain of missing performance targets, spiraling bad loans, and end of year pay cuts.

“Right now, we’ve nowhere to issue new loans” said Mr. Zhang, a general manager in charge of new loans at one of the listed commercial bank branches. Zhang believes NPL ratios have yet to peak, with SME loans the worst hit area.

Ironically this has forced Zhang to direct lending back to the LGFVs, property developers and conglomerates, industries which the Chinese government had previously instructed banks to restrict lending to, based on oversupply and credit risk fears.

Mr. Zhou, a junior banker at another commercial bank explains his predicament. “If I don’t issue more loans, then my salary isn’t enough to repay the mortgage, and car loan. It’s not difficult to issue more loans, but lets say in a years time when the loan is due, if the borrower defaults, then I wont just see a pay cut, I’ll be fired, and still be responsible for loan recovery”.

That’s a lot of pressure on Chinese bankers, and no doubt another reason why Chinese banks are unwilling to write off bad loans. Although Zhou has yet to lose his job, due to the increasing NPLs over the past two years, his bonus has been halved.

Double down 

Despite the rising NPL risks, Zhang explains why banks are still under pressure to issue more loans.

Following interest rate liberalisation, the recent series of interest rate cuts, and increasing competition from internet finance platforms, banks are earning less on the savings and loans interest rate spreads.

According to Ping An Securities, bank interest rate spreads were around 2.4% in 2015, 17bps down on 2014, with another 10bps fall predicted for 2016.

With tighter margins, the aim of the game for Chinese bankers then becomes…issue more loans.

Yet Zhang worries that if the economic slowdown persists longer than expected, then bank bad assets will grow at a faster rate, causing a further deterioration in bank profits. And thus more cuts to bankers pay.

Both alternatives appear bleak for Chinese bankers, but if issuing more loans offers a guaranteed short term return, with only the potential for long term losses, its not hard to understand why Chinese banks will keep issuing more loans. 

Thus it seems, without structural reform, China’s state dominated banking system remains geared to its traditional role of pumping more leverage into the economy, in the hope new loans at lower rates, will hide the old souring debts.

But with each dollar of credit now only generating a 27 cents increase in GDP in 2015, half the increase in 2011, this approach is looking increasingly like the gambler’s ruin problem.


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Cited in Zereohedge “A Chinese banker explains why there’s no way out”:


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