S&P: Commercial lenders likely to see more credit troubles in 2012

The ratio of non-performing loans among Chinese commercial lenders is likely to reach as high as 5 percent in 2012, Standard & Poor's Financial Services LLC, an international rating agency, said on Tuesday.

Liao Qiang, a Beijing-based researcher at S&P, said at a media briefing that the ratio will probably increase by 2 or 3 percentage points during the year as the domestic economy slows down and businesses' cash flow dries up.

By the end of 2011, the non-performing loan ratio for Chinese lenders had stood at 0.96 percent, up by 0.01 percentage point from the third quarter, according to data from the China Banking Regulatory Commission.

Mei Xingbao, an external supervisor for the Bank of China Ltd, said a ratio of less than 2 percent is very low.

In the fourth quarter, the value of Chinese commercial banks' outstanding non-performing loans increased by 20.1 billion yuan ($3.19 billion), or by 4.9 percent, from three months before.

That was the first time since 2005 that both figures have shown an increase.

"Non-performing loans will not increase greatly in 2012," Liao said. "Instead, they will go up at a gradual pace. Loans made to exporters, especially small ones, are the most likely to turn sour since they have been battered the most by the European debt crisis. Slowing exports and increasing labor costs will hamper borrowers' cash flow."

After years of prosperity, Chinese banks could have to contend with a slump in 2012. Several circumstances have made losses on loans more likely to occur, according to a separate report released by S&P on Monday.

They include China's slowing domestic economy, re-valuations in local property markets and the obstacles many local governments face to refinancing their heavy debts. The report also said the debt crisis in Europe continues unabated.

"These factors, along with a possible softening of lending rates, could erode Chinese banks' profitability in 2012," it said.

With the expected rise in loan losses and a drop in net interest margins, S&P predicted the banking industry's return on its average assets will decrease to somewhere between 0.8 and 1 percent for 2012, coming down from 1.3 percent in 2011.

Nevertheless, S&P believes the banking industry will be able at the least to ride out a downturn in the next one or two years.

"Credit buffers are reasonable, interest rate spreads are healthy, and liquidity remains sound throughout the banking system."

"The banking sector's low (non-performing loans) base and good earnings capacity, along with a still robust economy, give Chinese banks adequate room to absorb a possible moderate spike in credit losses."

The report noted that local regulators have relentlessly increased the amount of reserves that banks are required to hold aside as protection against losses on loans. That will help to prevent their performances from fluctuating greatly in 2012.

At the end of 2011, commercial banks' ratio of loan-loss reserves to their gross non-performing loans stood at 278.1 percent.

The rating agency said its outlook for the Chinese banking industry remains stable, but warned that a sharp economic slowdown and a sudden increase in the amount of banks' non-performing loans could lead to downgrades.

The report said it might also increase the ratings if banks maintain their credit performance throughout the downturn or acquire larger reserves of capital.

wangxiaotian@chinadaily.com.cn