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Big Bad Banks are Back
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Victor Shih | Oct 28, 2008

I just saw a pretty alarming figure today from the 21st Century Economic Herald. I attach it here for readers' reference, but unfortunately, it is in Chinese. Let me explain though. The rows basically show changes in non-performing loans in 100m RMB unit and in percentage for state banks, joint-stock banks, city commercial banks, agricultural commercial banks (RCCs), and foreign banks respectively. The columns are 1Q08, 2Q08, 3Q08, and change between 1/1/08 and 3Q. Although overall, banks were able to achieve "double declines," an important CBRC target that seeks to decrease both NPL amount and NPL ratio. However, as we can see on the second row with figures, much of the work is done by the joint stock banks. For the state banks (ICBC, ABC, BOC, and CCB) shown on the first row with figures, 2Q and 3Q NPL amount actually increased by 10 billion and 14 billion RMB respectively. As a percentage, that is a small increase, but it is the first such increase in a few years. Overall, state banks, which control like 60% of the market, saw an increase of 2.4 billion in NPLs. Granted, that is a tiny amount. However, please bear in mind that the state banks are in the mean time writing off loans every quarter (if readers know by how much, please share, but my guess is 2-300b RMB a quarter). Also, the loans that show up as NPLs now were already in trouble at the beginning of the year. I think in most places, real estate developers didn't get in serious trouble until June or so. Thus, as we move toward first and second quarter next year, the loans that are currently overdue (not non performing) will become NPLs. I think the market is reacting to this now and will continue to react as such until the true scope of the problem is known.

The up side of the story, however, is that the joint-stock banks are holding up remarkably well in the current environment. Of course, some of them, like Industrial Bank, may be in trouble in the future. However, thus far, they have managed to hold down NPL ratios. The real estate problem will hit them hard, but perhaps better corporate governance will keep them from too much trouble. This accords with my paper from a couple years back showing joint-stock banks as the best performing banks in China. For the foreign banks, they begin with a clean balance sheet, but they are now facing the first real challenge of doing business in China. This will be a true test of whether their due diligence works in China. I suspect that there will be some nasty surprises for many.