Why 2013 is just the beginning of NPL waves for China banks

Around RMB 5trn expected over the next five years.

According to Barclays Research, 2013 is just the beginning of NPL waves. It expects around RMB 5trn cumulatively (c10% of China’s 2012 GDP) in next five years.

Barclays said, this is based on our top-down approach and assumes “excess bank loans” between 2009-12 and 25% NPL ratio for public and 2.5% for "non-stimulus" loans.

Gross NPL formation rate of the normalized loans could reach 2.5% at the peak.

Here's more:

We believe the NPL cycle has just begun and estimate the gross NPL formation rate in the coming five years (2013E-2017E) to trend upward. The cumulative gross NPL formation rate between 2013 and 2017 in our base case scenario could come close to 5%, which is in line with our forecast.

In the worst case scenario, we estimate the cumulative gross NPL formation rate could be 7.1%, due to accelerating asset quality determination on MSE loans, WMPs and risky interbank assets.