BOFIT Viikkokatsaus / BOFIT Weekly 2016/37

Chinese banks have released their financial statements for the first half of this year. The overall condition of Chinese banks has deteriorated by several measures and large banks expect their condition to worsen in the near future. Provision of basic banking services remains the main generator of bank earnings. For large banks, the interest rate spread between loans and deposits continued to narrow in the first half. The average credit interest rate was 3.8 %, while the average deposit rate was 1.7 %, causing on-year profit growth of large banks to essentially cease. However, their profits were still rather hefty, totalling nearly 500 billion yuan ($75 billion) for the period.

The slowing economy and structural change are particularly worrisome for banks as they erode the ability of borrowers to pay back their loans. Even if banks this year have accelerated their write-downs of non-performing loans (NPL) compared to earlier years, the NPL stocks of China’s four largest banks have grown rapidly, reaching approximately 750 billion yuan ($110 billion) at the end of June. The declared NPL ratio remains relatively low (1.5–2.5 %), but the true amount of NPLs is likely substantially larger given the traditional reluctance of banks to recognise NPLs and preferring instead to roll over bad loans. The IMF estimates that 15 % of the borrowing of China’s exchange-listed firms is likely to end up classes as NPLs. In addition, there has been an increase in overdue payments beyond 90 days. The economic condition of smaller banks is reportedly even more challenging than that of the larger banks.

China’s banking regulations require that banks hold reserves equal to at least 150 % of their NPL portfolio. Regarding the largest banks, the NPL provisions of ICBC in June fell to 143 %, while the reserves of CCB and BoC were still slightly more than the minimum requirement. It is unclear whether China’s main bank regulator, the CBRC, will intervene on rule violations. Already at the start of the year, officials were suggesting that the requirement could be lowered to 120 %. Although no decision on the issue has been published, market participants speculate that regulation are not being strictly enforced at the moment.

Despite the headwind facing banks, China’s Postal Savings Bank is preparing for an IPO listing on the Hong Kong stock exchange. The emission, currently valued at $7–8 billion, would be the largest IPO listing this year globally in terms of market capitalisation. The IPO is believed to offer a 15 % stake in the bank’s shares and with the largest buyers expected to be the state-owned China Shipbuilding Industry corporation and Shanghai International Port Group, which both have committed to purchase slightly over $2 billion in shares. China Post Group will continue to be the bank’s largest owner after the IPO. China’s Postal Savings Bank at the end of last year was the world’s 22nd largest commercial bank measured by total assets and its network of 40,000 branch offices was the largest in China.