Chinese Banks Improve Asset Quality by Writing off Non-performing Loans


A new study from Ernst & Young found that the asset quality of Chinese banks has seen improvements over the past year, yet risks arising from high leveraged, excess capacity sectors continues to put pressure on lenders. 

The study of 41 listed state-owned banks shows that NPL’s saw a 56.8 billion yuan increase in 2017 to reach 1.3 trillion yuan, while the weighted average NPL ratio fell to 1.55% from 1.65% the year previously.

Special mention loans and overdue loans also saw declines in their respective percentages for the sector.

According to EY the write-off and disposal of NPL’s played a critical role in improving the asset quality of Chinese banks last year, transferring 582.3 billion yuan in loan impair reserves, for an increase of 10.4 billion yuan compared to 2016.

“Without these write-offs and disposals, NPL’s will certainly grow,” said Steve Xu, partner of financial services at EY Hua Ming, according to a South China Morning Post report. “So we’d better keep prudent risk prevention.”

Asset quality has continued to improve for some Chinese lenders since the start of 2018, with the NPL ratios of 29 listed banks falling from 1.55% to 1.52% by the end of March, as year-on-year growth in net profits accelerated to 5.95% from 4.87%.

Data from the China Banking and Insurance Regulatory Commission is less sanguine, however, pointing to a slight increase in the NPL ratio for the Chinese banking sector as a whole in the first quarter, for the first rise in five quarters.

According to CBIRC the Chinese banking sectors NPL ratio stood at 1.75% at the end of March, as compared to 1.747% at the end of 2017.

‘In terms of asset quality in the second half onwards [of 2018], we are still cautious as the fall in non-peforming loans ratio in 2107 can be partly attributed to the greater bad-loan write-offs and disposals,” said Xu.

“It can hardly be said that we have come to an inflection point…it is better not to be too optimistic.”