The cleanup of the murky balance sheets of China's banks may already be proceeding apace even though they have long spurred fears of an impending crisis, believes UBS.
"Contrary to prevailing market wisdom, we believe considerable progress has been made in recognizing and dealing with the problems," Jason Bedford, an analyst at UBS, said in a note Thursday, citing analysis of 765 banks on the mainland.
"Recapitalization and bailouts have started and made unexpected (and under-appreciated) progress," he said. Since the early 2000s, 2015 was the first year with sizable bank bailouts, the UBS research suggested, Bedford added.
There have been long standing concerns about the banking sector in China with fears that their lending too often was politically directed into industries with too much capacity and the non-performing loans (NPLs) of the banks were grossly underreported. While large banks saw their NPL ratio fall 3 basis points on-quarter to 1.69 percent, which it attributed to large NPL write-offs and disposals during the quarter, Daiwa said separately in a note that the sector's NPL ratio in the second quarter remained flat at 1.75 percent.
China's government used the banks to inject stimulus into the broader economy during the global financial crisis. The banks now hold high volumes of non-performing loans — a problem that is worsening as industrial profitability falls and debtors struggle to service interest payments as a result of the lending which resulted in debt levels rising sharply among local governments and state-owned companies.
Losses 400 percent larger than the around $650 billion equity hit that U.S. banks took during the subprime mortgage crisis could be racked up by the country’s banks if there is a debt crisis in the Chinese banks warned storied hedge fund manager Kyle Bass in February.
The credit for correctly calling the U.S. subprime housing collapse that kicked off the 2008 global financial crisis was made by Bass who was famed as one of the few major investors to make the prediction. Michael Lewis' book "Boomerang," which was about the European credit crisis, had a mention about him due to his prescience.
Write-offs and disposal of bad assets for the Chinese banks have risen three-fold since 2013, noted UBS' Bedford. Between 2013 and 2015, the Chinese banks had written off 1.65 trillion to 1.8 trillion yuan (around $250 billion-$270 billion) worth of non-performing assets, he said citing a review of 173 banks' financials. That figure was equivalent to 2.05 percent of total loans or 142 percent of NPLs at the end of 2015.
"More surprising is the size of some individual bank bad asset disposals—many were equivalent in size to 4-15 percent of the banks' total loans," he said.
Chinese banks' total new equity issuance was around 620 billion yuan from the second half of 2014 to the second half of this year, UBS estimated.
But that didn't mean all was sweetness and light for China's banks.
The banking sector, which had grown to 179 trillion yuan in assets, needed much more for cleaning it up, Bedford said.
"We believe that we are at the early stage of the process and that bad debt accumulation is significant and still rising. We also note that progress across the country was asymmetrical, with provinces with the weakest economic fundamentals (Inner Mongolia, Heilongjiang, Liaoning, etc.) recording the least progress in resolving issues at their local lenders," he said.
(Source:www.cnbc.com)
"Contrary to prevailing market wisdom, we believe considerable progress has been made in recognizing and dealing with the problems," Jason Bedford, an analyst at UBS, said in a note Thursday, citing analysis of 765 banks on the mainland.
"Recapitalization and bailouts have started and made unexpected (and under-appreciated) progress," he said. Since the early 2000s, 2015 was the first year with sizable bank bailouts, the UBS research suggested, Bedford added.
There have been long standing concerns about the banking sector in China with fears that their lending too often was politically directed into industries with too much capacity and the non-performing loans (NPLs) of the banks were grossly underreported. While large banks saw their NPL ratio fall 3 basis points on-quarter to 1.69 percent, which it attributed to large NPL write-offs and disposals during the quarter, Daiwa said separately in a note that the sector's NPL ratio in the second quarter remained flat at 1.75 percent.
China's government used the banks to inject stimulus into the broader economy during the global financial crisis. The banks now hold high volumes of non-performing loans — a problem that is worsening as industrial profitability falls and debtors struggle to service interest payments as a result of the lending which resulted in debt levels rising sharply among local governments and state-owned companies.
Losses 400 percent larger than the around $650 billion equity hit that U.S. banks took during the subprime mortgage crisis could be racked up by the country’s banks if there is a debt crisis in the Chinese banks warned storied hedge fund manager Kyle Bass in February.
The credit for correctly calling the U.S. subprime housing collapse that kicked off the 2008 global financial crisis was made by Bass who was famed as one of the few major investors to make the prediction. Michael Lewis' book "Boomerang," which was about the European credit crisis, had a mention about him due to his prescience.
Write-offs and disposal of bad assets for the Chinese banks have risen three-fold since 2013, noted UBS' Bedford. Between 2013 and 2015, the Chinese banks had written off 1.65 trillion to 1.8 trillion yuan (around $250 billion-$270 billion) worth of non-performing assets, he said citing a review of 173 banks' financials. That figure was equivalent to 2.05 percent of total loans or 142 percent of NPLs at the end of 2015.
"More surprising is the size of some individual bank bad asset disposals—many were equivalent in size to 4-15 percent of the banks' total loans," he said.
Chinese banks' total new equity issuance was around 620 billion yuan from the second half of 2014 to the second half of this year, UBS estimated.
But that didn't mean all was sweetness and light for China's banks.
The banking sector, which had grown to 179 trillion yuan in assets, needed much more for cleaning it up, Bedford said.
"We believe that we are at the early stage of the process and that bad debt accumulation is significant and still rising. We also note that progress across the country was asymmetrical, with provinces with the weakest economic fundamentals (Inner Mongolia, Heilongjiang, Liaoning, etc.) recording the least progress in resolving issues at their local lenders," he said.
(Source:www.cnbc.com)
