Chinese banks strong enough to endure bad loans

Despite forecast of 20% rise in 2010 loans, NPL and other problem loans ratio are expected to remain below 10% for the next two years.

A Standard & Poor's Ratings Services report entitled "Are Chinese Banks Strong Enough To Withstand A Likely Spike In Bad Loans?" notes Chinese banks appear financially strong enough to withstand the expected pressure on profits.

Standard & Poor's credit analyst Ryan Tsang said, "The potentially steep rise in NPLs and other problem loans will be the biggest challenge for the banking sector in the next few years. But we think the sector will continue to have sufficiently good profitability, reasonable NPL ratios, and adequate capitalisation to keep the bad loans at a manageable level."

The assumption is based on an expectation that "Chinese authorities will continue to implement a mix of administrative measures and market mechanisms at a measured pace to curb the record pace of lending growth that began in late 2008 and has continued this year."

Tsang added, "The reform of financing platforms of local government and UDICs will likely moderate the impact of a potential surge in bad loans. While local governments are motivated to support UDICs to a certain extent, they have no clear legal or contractual obligation to do so."

In addition, a more abrupt policy change which could lead to serious problems for the sector is not seen as a likely scenario.