China’s banking sector continues to weaken

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/45

Listed Chinese banks have recently released their third-quarter financial reports. The spread between deposit and lending rates of big banks continued to narrow and earnings continued to shrink. Banks responded to falling income by cutting expenses e.g. laying off staff. Most banks have also reduced their buffers in an effort to boost profits. In spite of that, profits grew only modestly (0–2 % y-o-y) in third quarter. Similar trends are also seen in the listed medium-sized banks.

The portfolios of non-performing loans (NPLs) held by large banks generally continued to rise last quarter. The exception was China Construction Bank (CCB), which announced a slight reduction in its NPL portfolio. However, junk loans represent just 1.5–2.4 % of the loan portfolios of the four large state banks. The actual figures are suspect, however; banks are reluctant to indicate a loan as non-performing and prefer to roll over the bad loan.

Banking rules in China require that banks maintain provisions equal to 150 % of their NPL portfolio. Among the large banks, only Agricultural Bank of China (ABC) clearly exceeds the requirement (173 %). Bank of China’s NPL reserves are currently at 157 %. CCB’s reserve ratio has fallen to 149 % and Industrial and Commercial Bank of China’s (ICBC) had declined already to 136 %. The consequences, if any, from the violations of CCB and ICBC are still unknown, but officials seem to be leaning towards relaxing the rules rather than punishing the banks. Mid-size listed banks have higher NPL provisions, but also report suspiciously low NPL portfolios.

Large Chinese banks, which have significantly increased their foreign presence over the past ten years, have found international expansion challenging at times. In November, New York state officials issued an over $200 million fine to ABC for violating anti-money-laundering rules.

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