Fitch warns of bad debt tsunami overwhelming China’s banks

Fitch Ratings Ltd expects the balance sheets of Chinese banks to deteriorate until the first-half of 2013.

It also warns of downgrades of some banks' Viability Ratings. It raised concerns about the rapid expansion of Chinese banks' balance sheets despite the worsening operating environment.

Fitch noted that Chinese banks continued to expand their balance sheets at a rapid pace, with system assets rising 11.9% (un-annualized) in the first-half, making it the second-fastest first-half on record.

The banks’ first-half results also show that decelerating economic growth and declining corporate profitability have begun to take a toll on asset quality and earnings. Yet despite this deterioration, banks continued to grow their balance sheets.

Fitch warned that China's banking sector assets will jump to more than US$21 trillion if the second half continues at the same pace compared to US$ 9 trillion in 2008.

“We have long held the view that such aggressive expansion at a time of weak global and domestic economic fundamentals has the potential to lead to large loan repayment problems, and could ultimately undermine solvency,” Fitch warned.

It said data for the first-half of this year indicate that this process may now be underway and that this could result in downgrades of some banks' Viability Ratings.

Fitch said that since Chinese banks' Long-Term Issuer Default Ratings are based entirely on state support, they will only be revised in the event of a shift in the ability or willingness of the state to support the banks.

Balance sheet expansion in H112 was driven primarily by rapid growth of interbank exposures, which rose 29%, compared with corporate and retail credit growth of 9% (both un-annualized).

Moody’s Investor Services last week warned that the first-half results of Chinese banks showing deteriorating asset quality and slowing profit growth “. . . mean the end of a multi-year streak of improving financial performance.”

It also said there is evidence of higher NPLs in the pipeline. Special-mention loans, in which a borrower currently able to make interest and principal payments faces a negative development in his payment capability, are generally on the rise.

“Delinquent loans, defined as any loan with principal repayment or interest payment overdue at least one day, are also rising.”.