Chinese Commercial Banks Post First Rise in Non-performing Loan Ratio Since 2016


China’s commercial banks have just posted the first increase in their non-performing loan (NPL) ratio since the end of 2016.

The NPL ratio of Chinese commercial banks lifted to 1.75% in the first quarter of 2018, from 1.74% at the end of last year, for the first increase since the fourth quarter of 2016.

The ratio had previously held at 1.74% for five successive quarters, from the Q4 2016 until Q4 2017, prompting speculation in some quarters that China’s dud loans had tapped a peak.

Chinese commercial banks had an outstanding NPL balance of 1.77 trillion yuan as of the end of the first quarter, for an increase of 68.5 billion compared to the end of 2017.

Chinese banks also saw a decline in their capital adequacy ratios in the first quarter. Their core tier 1 capital adequacy ratio fell 4 basis points year-on-year to 10.72%, while they tier 1 capital adequacy ratio fell 7 basis points to 11.28%, and their capital adequacy ratio fell by 1 basis point to 13.64%.

A report from China Orient Asset Management previously said that the bad loans of Chinese commercial banks are set to worsen in 2018, while real NPL ratios are likely much higher than reported figures due to efforts by lenders to conceal lending gone awry.

The “China Financial Non-performing Asset Market Survey Report (2018)” (中国金融不良资产市场调查报告(2018)) released by China Orient Asset Management on 12 April claims that the NPL ratios of Chinese commercial banks have been widely underestimated on paper, with lenders incentivised to “gloss over” their financial reports and conceal their NPL’s using performance assessments and new regulatory requirements.

The report said that Chinese banks are using a range of methods to conceal NPL’s, including reductions in assessment standards and the provision of falsified reports.

The report also forecasts that banks won’t see a peak in their NPL-ratios until 2020, after which point they’ll begin to decline.

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