Growing bad loan burden dims Chinese banks' H1 profit outlook

Profits of the country’s top five banks are expected to rise around 4.7% to 7%.

Reuters reports that China’s largest state banks could expect mildly positive profit prospects in the first half of 2018 within the 4.7% to 7% range on the back of robust loan margins ahead of their half-year financial results announcement. 

The banks’ rapidly growing bad loan burden, however, poses a threat to the otherwise rosy outlook for China’s largest lenders after the nonperforming loan ratio hit a nine-year high at 1.86% in June.

Also read: More bailouts loom as staggering bad loans batter Chinese rural banks

Outstanding bad loans from commercial banks correspondingly jumped from $26.56b (CNY182.9b) in Q1 to a whopping $284.64b (CNY1.96t) in Q2.

“The market expects a deterioration in quality of assets in the banking sector because of the slowing down of the economy,” said Steven Leung, Hong Kong-based sales director, UOB Kay Hian.

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The economic slowdown along with China’s widespread deleveraging campaign have squeezed liquidity conditions in the country’s banking sector, making it harder for companies to repay their loans, in effect accelerating the rate of slippages and deteriorating asset quality.

Rural commercial banks have the highest NPL ratio amongst the country's lenders in Q1 at 3.26% which could prompt bailouts in the form of forced mergers or share capital injections.

Joint stock banks and city commercial banks fare slightly better with NPL ratios of 1.7% and 1.53% respectively.

Here’s more from Reuters: