Date
15 December 2017
A worker at a textile factory in Linhai, Zhejiang province, in a file photo. The Yangtze River Delta region has seen a spurt in bad loans as China's economy slowed and companies secured less export orders. Photo: Reuters
A worker at a textile factory in Linhai, Zhejiang province, in a file photo. The Yangtze River Delta region has seen a spurt in bad loans as China's economy slowed and companies secured less export orders. Photo: Reuters

Yangtze River Delta the new epicenter of bad loans

It’s an acknowledged fact that a slower economy and narrowed loan-deposit rate spreads have put an end to the era of easy profits at China’s banks, particularly at joint-stock commercial lenders.

Yet it’s interesting to note that the Yangtze River Delta (YRD), China’s predominant economic region that contributed one fifth of the nation’s gross domestic product last year, has become one of the worst areas in terms of non-performing loans (NPLs) of many lenders.

According to the 2013 annual reports released so far, NPLs incurred at YRD branches accounted for the bulk of banks’ bad loans. The Yangtze River Delta region includes Shanghai city and Zhejiang and Jiangsu provinces.

Take China CITIC Bank (00998.HK, 601998.CN) for instance. Bad loans incurred in the YRD region represent more than 53 percent of the bank’s total and 68 percent of its new NPLs. The lender’s vice president Sun Deshun {孫德順} admitted that the proportion could have been higher had it not been for Zhejiang and Jiangsu branches’ relentless efforts to sell or write off bad assets as much as possible during the second half last year.

Around one third of NPLs at China Merchants Bank (03968.HK, 600036.CN), China Minsheng Bank (01988.HK, 600016.CN), Ping An Bank (000001.CN) and China Everbright Bank (06818.HK, 601818.CN) were also booked in the YRD area.

Shanghai Pudong Development Bank (SPD, 600000.CN) and Bank of Communications (BoComm, 03328.HK, 601328.CN)– both of which have their domiciles in the YRD — didn’t specify by region the proportion of their NPLs. However, it’s noteworthy that SPD’s Zhejiang branch, once the lender’s cash cow, saw a 26 percent slump in operating revenue; and that Zhejiang and Jiangsu got special mention in BoComm’s report on risk control, as the bank’s bad loans increased by 7.3 billion yuan (US$116.9 million) to 34.3 billion yuan.

Bank of Ningbo (002142.CN) and Bank of Nanjing (601009.CN) are yet to hand in their report cards, but since the duo are largely regional lenders and depend on the YRD region for the bulk of their earnings, analysts have reason to expect gloomy NPL figures.

Figures from the China Banking Regulatory Commission put China’s overall NPLs at 592.1 billion yuan last year. Meanwhile, the Shanghai University of Finance and Economics’ Center for Modern Finance estimates in a report that YRD’s share can be as much as 200 billion yuan.

Although it’s still unlikely that bad loans could drag the institutions into the abyss of a systematic credit ruin, the deteriorating asset quality of numerous small to medium enterprises in Jiangsu and Zhejiang may continue to affect lenders.

It also takes time for the regional financial ecosystem to heal from the economic downturn as well as the government’s crackdown on shadow banking based on mutual guarantee by debtors. As Beijing pushed ahead its plan to tackle industrial overcapacity and pollution, the bad loans in YRD may continue to climb this year.

Some industries in the region are particularly prone to risks. They include small property developers that have high gearing and chunks of unsold homes in lower-tier cities; and steel traders that are grappling with overcapacity, price cuts and tepid demand.

According to figures from the Shanghai Judiciary website, 1,033 cases concerning loan disputes will be heard in the city’s courts by the end of the year, involving more than a dozen banks.

– Contact the writer at [email protected]

RC

EJ Insight writer

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