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Thursday, September 11, 2008

Outlook for China's Banks

WSJ analyzes the outlook of China's big banks.  A related research on the financial repression in China by N. Lardy of Peterson Inst.

China's Banks Face Hurdles


 

Benefiting from rip-roaring economic growth and solid loan demand, China's banks have been the envy of their peers the world over. Now that economic growth has moderated, their outsize performance will be hard to sustain.

First-half profits at the nation's top four listed banks -- Bank of China, Industrial & Commercial Bank of China, Bank of Communications and China Construction Bank -- grew between 38% and 81%. Net interest margins continued to widen, and bad loan levels fell.

Nonperforming loans fell to 6.1% of outstanding loans at major Chinese banks by June's end, compared with 6.7% at the close of 2007, according to the country's banking regulator. In 2002, just before Beijing's last bank bailout, nonperforming loan levels were over 20%.

[Chinese banks]

Of course, that's history.

China's economic growth rate is slipping, taking corporate performance with it. Overall profit growth for 1,619 mainland-listed companies rose 16% in the first half, compared with a 49% rise in 2007, according to JPMorgan figures.

Evidence of a slowdown in the property sector has some worried. Real estate sales were down 20% on the year in July, for example.

As growth slows, the banks' outlook will depend largely on how disciplined they've been about managing credit risk. This hasn't been tested since the government's 2003 bad-loan bailout.

Loan growth since then -- of more than 13% in each of the last two years -- has given Chinese banks among the most unseasoned collective loan books in Asia. There's little data history for banks to stress-test their books effectively.

What can be said is there are few signs the banks have excessive exposure to deteriorating asset quality in one or another problematic sectors, whether real estate or export-focused manufacturers.

It's particularly true of the property sector. Commercial bank mortgage lending was around 11% of total loans at the end of 2007, while lending to property developers was 7% -- a total exposure of 18%. In the U.S., the comparable total figure was 53%, according to Goldman Sachs.

So even if this won't be anything like the crisis conditions afflicting Western peers, declining performance is likely.