Chinese Banks Face Rising Bad Loans, Narrower Margins

By Zhang Dingmin

Nov. 15 (Bloomberg) -- Chinese banks face rising bad loans and narrowing profit margins as the central bank cuts interest rates to boost expansion in the world's fourth-largest economy, the banking regulator said.

Lenders may suffer further losses on their overseas assets as the global financial crisis remains ``far from over,'' China Banking Regulatory Commission Vice Chairman Jiang Dingzhi told a financial forum in Beijing today.

Chinese banks are scaling up lending after the government pledged a 4 trillion yuan ($590 billion) stimulus plan on Nov. 9 to bolster growth as the world heads toward recession. The nation's six largest listed banks will report declining profits in 2009 as lower interest rates will shrink margins and loan defaults may increase, HSBC Holdings Plc said in a research note Nov. 12.

``Bad loans are already showing an upward trend, especially in the property market where the mortgage default risk is growing at an accelerating pace,'' Jiang said, without elaborating. ``We can't take this light-heartedly.''

The People's Bank of China has cut interest rates three times this year after economic expansion cooled to 9 percent in the third quarter, the slowest pace in five years. Banks reduced their average bad-loan ratio to 5.49 percent at the end of September, from 6.3 percent at the end of March, as they enhanced risk controls.

``China's banks are feeling pain from rate cuts, plus direct and indirect impacts from the current global financial crisis,'' Hong Kong-based HSBC analysts Todd Dunivant, Shary Wu and Katherine Lei wrote in a Nov. 12 report.

`Good Health'

China's banking system remains ``in good health'' with all major indicators at their best levels ever, Jiang said. Banks' total assets, 59.3 trillion yuan at the end of September, were five times the level of 10 years ago when the Asian financial crisis happened, he added.

China Construction Bank Corp., the nation's second-largest, said Nov. 13 it will increase its full-year lending target by as much as 50 billion yuan in response to the government's economic stimulus plan. Lending will focus on railways, roads and airport construction as well as the real estate industry.

To contain the impact from global financial turmoil, the CBRC will enhance risk assessment of foreign banks operating in China, Jiang said, without being specific. The regulator will also strengthen monitoring of ``large'' capital outflows.

``Our judgment is that losses at the world's financial institutions will widen further, and capital shortfalls will become more serious,'' Jiang said. ``The financial crisis won't end in the near term.''

Deposit Insurance

The need for the establishment of a deposit insurance system in China to protect its savers in the event of banks failing ``has become more urgent,'' the official said on the sidelines of the conference. It's ``not very likely'' that such a system can be set up by the end of the year, Jiang said, declining to give a timetable.

Bank of China Ltd., the nation's largest foreign-exchange lender, said Oct. 29 that third-quarter profit rose at the slowest pace in two years as loan demand declined and writedowns on securities tied to subprime mortgages and other U.S. credit investments widened to $3.6 billion.

To contact the reporter for this story: Zhang Dingmin in Beijing at Dzhang14@bloomberg.net