When Goldman Sachs economists wanted to bring their global clients up to speed on the risks in China’s credit boom, they spoke to Charlene Chu, the Fitch Ratings analyst known for her bearish views.
Ms Chu has studied China’s shadow finance sector to come up with one of the highest estimates of the country’s debt pile at more than 200 per cent of gross domestic product. She also warns that the banking sector is far more exposed to many of the shadow loans than most people realise.
The latest official figures show non-performing loans (NPLs) at Chinese banks grew by Rmb13bn ($2bn) in the second quarter to Rmb540bn, increasing for a seventh straight quarter.
More than a decade ago, Beijing set up four state-funded asset management companies (AMCs) to take over the bad debts of the four biggest state-owned banks. After a rocky start, the bad banks have become adept at working out problem loans in only the past couple of years, according to bankers. Read More
WHEN India loosened its rules on how banks deal with bad debts in 2008, the financial crisis was raging. The aim, sensible enough, was to give breathing room to borrowers in temporary difficulty because of a shock that originated thousands of miles away in America’s housing market. Five years on, however, the policy has come back to haunt the country’s financial industry.
Bank loans are usually classified as either performing or non-performing. If non-performing, lenders must build up reserves against potential losses. In 2008 the Reserve Bank of India (RBI), the supervisor, permitted the widespread use of an intermediate category of “restructured” loans. The terms of these loans had been watered down to help the borrower but banks could assume any difficulties were a blip and avoid building up provisions.
The spirit of that rule has been abused in the past five years as firms have rushed to get laxer terms in order to avoid admitting they are bust—ably assisted by their bankers. Consider India’s state-owned banks, which are responsible for three-quarters of all bank loans and where bad debts are overwhelmingly concentrated.
The proportion of the present stock of restructured loans that has deteriorated to become non-performing has risen, to 25% in the case of State Bank of India, the biggest government-run lender. That disproves they are safe. And total problem loans, either non-performing or restructured, have reached 9% of the total, according to Morgan Stanley (see chart). That is alarmingly near the level of a decade ago, when Indian banks were in the doghouse. Read More
Europe’s non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts andnon-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain’s bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).
With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks, it seems the Cyprus deposit haircut non-template may indeed become the key template.
Simply put, the greater the unemployment the more the strain on banks to generate “profits” by any means possible (GGBS?) to cover the capitalization shortfall from NPLs until at some point liability haircuts have to begin…
Non-performing loans as % of total loans across the Euro area
Unemployment rates across Euro area countries Read More
HSBC said its first quarter profits almost doubled from a year ago to more than $8 billion (5 billion pounds) as bad debts and costs fell, with Europe’s biggest bank showing the benefit of a 3-year restructuring plan.
HSBC reported a pretax profit of $8.4 billion on Tuesday, up from $4.3 billion a year ago and above the average forecast of $8.1 billion from analysts polled by the company.
Losses from bad debts plunged 51 percent to $1.2 billion and costs fell 10 percent in the first quarter from a year ago, benefiting from Chief Executive Stuart Gulliver’s drive to streamline operations, reduce complexity and axe businesses that are unprofitable or lack scale. He has shed 52 businesses since taking over in early 2011.
India’s leading banks need to mimic the mass scale of Chinese financial institutions if they are to meet increasing demands for infrastructure investment and economic development, the head of the country’s largest private bank by assets has said.
Chanda Kochhar, chief executive of ICICI, told the Financial Times that her bank planned to open its first full branch in Shanghai later this year, while also predicting possible future consolidation in the sector as Indian banks sought global scale over the next decade.
However, Ms Kochhar warned that problems of weakening asset quality and bad debts among India’s largest industrial companies could worsen in the short term, against a backdrop of sluggish growth in Asia’s third-largest economy that has seen bank expansion slow sharply.
“In India we do need bigger banks, as we have had to fund $1tn of infrastructure expenditure [over the next five years],” Ms Kochhar said, claiming that the country’s banking system had the capacity to expand at three times the rate of overall economic growth, or up to 24 per cent annually. Read More
Indian banks reiterated their demand for higher tax deductions for provisions of bad debts as well as a reduction in the lock-in period for fixed deposits (FDs) from five years to three years to be eligible for tax deduction.
The demands were made at a pre-budget meeting with finance minister P. Chidambaram on Monday.
Banks also asked that interest on FDs for the purpose of tax deducted at source be increased to Rs.25,000 from Rs.10,000.
The lenders sought an extension of the interest subvention scheme for agricultural loans to term loans and loans to self-help groups, bankers said. Currently, interest subvention is available only to credit limits extended to farmers.
Some banks also sought the reintroduction of tax-saving bonds with a tax exemption of Rs.20,000, the finance ministry said in a statement. Read More
For the 20 banks that have declared their September quarter earnings, bad loans rose sharply in the past three months. Collective gross non-performing assets (NPAs) for this set of banks rose by Rs.7,219 crore, or 14.3%. The run rate of bad loan accumulation was sharper than in the June quarter, when gross bad debts rose by Rs.3,340 crore, or 7%.
The main culprits, as has been the case in the past several quarters, were state-owned banks. Punjab National Bank saw its bad loans rise by Rs.4,035 crore, or 40%, in the past three months. Bank of Baroda saw bad loans increase by one-tenth in the September quarter and Indian Overseas Bank’s rose by one-fifth.
But these were the outliers. Even if the numbers of these three offenders are excluded, bad loans for the remaining 17 banks rose by Rs.1,737 crore in the September quarter, more than the Rs.728 crore slip seen in thee months ended June.
Eurozone finance ministers formally inaugurated a permanent €500bn rescue fund on Monday, but left unresolved whether it would be used to shoulder existing bad debts of Irish and Spanish banks.
Klaus Regling, managing director of the new fund, the European Stability Mechanism, said the issue of “legacy assets” – bank liabilities currently being wound down by the Irish and Spanish governments – had not been discussed in “any European body” and signalled the issue may not be resolved for months.
Still, eurozone officials insisted the creation of the ESM – which, unlike its temporary predecessor, will be funded by paid-in capital from eurozone countries rather than just guarantees – will give their crisis-fighting tools more credibility.
“The euro area now is equipped with a permanent and effective firewall,” said Jean-Claude Juncker, the Luxembourg prime minister who will chair the ESM board.
The issue of who will be responsible for bailing out weak eurozone banks was cast into uncertainty last month after finance ministers from Germany, Finland and the Netherlands insisted the ESM would not take on debts incurred while banks were being supervised by existing national regulators. Read More
China’s banks are coming after the country’s steel traders, hauling executives into court to chase down loans that some traders said they didn’t initially need and can’t now repay.
The heavy push to recover the loans is another sign of strain on China’s financial system at a time when the country’s leaders are contemplating another round of stimulus to boost the economy, and when banks are worried about bad debts piling up.
The battle between the banks and steel traders also exposes flaws in the 4 trillion ($629 billion) stimulus round in 2008, and offers a warning to those calling for pumping more money into the system. At that time, Chinese banks threw money at the steel trade – a crucial cog in supplying the country’s massive construction and infrastructure growth.
But those steel loans, after offering a quick fix, became excessive, poorly managed, or a combination of the two. Government officials insisted more money was needed to prop up the industry. Steel executives said the money flow was too heavy, and they had to put the money to work in real estate and the stock market. Read More
China’s financial system is seeing increasing risks as a slowing economy leads to an increase in bad loans, the Financial News said in a front page editorial Tuesday.
“Risks within the financial system can be easily exposed as the external environment changes and domestic economy slows,” said the newspaper, which is published by the People’s Bank of China.
“Bank non-performing assets may increase further as economic growth slows,” it warned.
The editorial follows comments Monday which appeared designed to cool speculation that the central bank is poised to cut the reserve requirement again following the release of disappointing economic data last week.
Non-performing loans rose CNY28.7 billion during the first half of this year to CNY452.8 billion, the newspaper said. Leading indicators for asset quality are also worsening. Those loans in the “special mention” category rose CNY72.7 billion in the first half to CNY1.45 trillion.
The State Council has held several meetings recently to discuss threats to the financial system and discussed the need to prevent the outbreak of systemic or regional risk.
Local governments are facing revenue shortfalls and may not generate enough income to repay their debts while bankruptcies in the real estate industry will add to bank bad debts, the newspaper said.