16 October 2018
Bank of China may benefit if the People's Bank of China allows a substantial yuan depreciation, Francis Chan (inset) says.  Photo: HKEJ
Bank of China may benefit if the People's Bank of China allows a substantial yuan depreciation, Francis Chan (inset) says. Photo: HKEJ

Commercial banks face risks in loans to manufacturers, retailers

Commercial banks in China have yet to see an improvement in their asset quality after the two rate cuts in November and early this month, according to an analyst at Bloomberg Intelligence.

The unsatisfactory performance of China’s purchasing manager index (PMI), which was below the 50-point threshold for the second month in February, reflected a weakening trend in the manufacturing and retail sectors, Francis Chan, an analyst covering Asian banks for Bloomberg Intelligence, said in a media briefing on Tuesday.

Such a trend will add risks to mainland-based banks’ loan businesses, Chan said.

Loans to manufacturers and retailers currently account for about a third of all loans issued by the banks while non-performing loans (NPLs) in this segment comprise about two-thirds of the overall bad debts.

Small and middle-sized banks that focus heavily on mainland-based Hong Kong and Taiwanese companies may face higher risk of having non-performing loans, he said.

The interest rate cut that took effect last Nov. 21 failed to stop the year-on-year growth of NPLs, which accelerated to 42.3 percent in the fourth quarter of last year from 36.1 percent in the previous quarter, he said. 

For the same period, state-owned banks grew saw year-on-year NPL growth up only 9 percentage points at 36.1 percent as they focused on loans to the state-owned-enterprises and mortgage borrowers. However, foreign banks saw their average NPL growth rate accelerate to 71.4 percent from 30.6 percent.

Foreign banks suffered more as many of them have offered loans to manufacturers and retailers in the Pearl River Delta and Yangtze River Delta regions, Chan said.

The two rate cuts since November may generate only a short-lived increase in loan growth while credit demand may remain subdued this year amid an economic slowdown, he said.

Rate reductions in June and July of 2012 were followed by just a 2.4 percent sequential loan growth in the fourth quarter of that year, down from a 4.2 percent growth in the second quarter.

To avoid defaults in the banking sector, the People’s Bank of China may have to consider methods on the currency side such as a sharp yuan depreciation, which will result in exchange gains for Chinese banks, Chan said.

Bank of China Ltd. (03988.HK) and Bank of Communications Co. Ltd. (03328.HK) will benefit the most among peers as they have more overseas assets, he said.

Although a yuan depreciation may run counter to the country’s policy of having a stable exchange rate, the central bank should strike a balance among the different factors, he added.

[Chinese version中文版]

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Chief reporter at EJ Insight

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