The latest “Financial Stability Report” released by the Chinese central bank indicates that off-balance sheet activity by country’s banks continues to grow, despite the ongoing deleveraging campaign undertaken by regulators with a view to stymieing systemic risk.
According to the report as of the end of 2016 the off-balance sheet business balance for Chinese banks was 253.52 trillion yuan, equal to 109.16% of their on-balance sheet assets
“Commercial bank off-balance sheet management continues to remain weak, while on-balance sheet risk could see cross-contamination,” said the report.
Compared to 2015, the banking sector saw a slight relent in downward pressure on asset quality in 2016, as well as modest fall in capital asset ratios.
As of the end of 2016 the non-performing loan balance for bank financial institutions was 2.19 trillion yuan, and 1.51 trillion yuan for commercial banks following 21 consecutive quarters of increase.
Special-mentioned loans and overdue loans both increased, rising to 5.28 trillion yuan and 3.24 trillion yuan respectively.
While capital adequacy ratios saw a modest uptick overall, commercial banks posted a CAR decline of 0.17 percentage points to 13.28%, with tier 1 CAR falling 0.16 percentage points to 10.75%.
As a consequence the report advocates that commercial banks make us of “innovative” capital supplementation tools, and expand the scope of equity-swap tier 2 debt issuance.
With respect to credit risk, the report notes for the first time that “operating risk and compliance risk cannot be overlooked,” as well as points to the potential formation of bubbles in parts of the housing sector.