Chinese commercial banks' bad loan ratio to hold below 1.9%

It already hit 1.87% in Q3.

The asset quality of China’s commercial banks is likely to remain stable in the near term with the sector’s bad loan ratio poised to stay below 1.9%, according to a report from Xinhua News Agency which cited a report released by the Bank of Communications.

Also read: Chinese commercial banks' profit up 6.37% to $149.58b in H1

The bad loan ratio of Chinese commercial banks rose by 0.01 percentage points on a QoQ basis to settle at 1.87% in Q3.

The ongoing economic restructuring and improving financing environment for private and small businesses poses less downard risk to asset quality. The amount of new bad loans also dropped sharply and the banks' provision coverage ratio, rose.

China’s megabanks, joint stock banks and city commercial banks are weathering the bad loan crunch better than their rural commercial peers who have been bearing the brunt of deteriorating asset quality brought about by the country’s economic slowdown.

Also read: China's megabanks beat bad loan cloud as half-year profits rise

In Q1, the bad loan ratio of rural commercial banks was the highest at 3.26% raising concerns about a looming bailouts in the form of forced mergers or share capital injections. Joint stock banks and city commercial banks fare slightly better with NPL ratios of 1.7% and 1.53% respectively.

“Small and medium banks are the weakest link in the deleveraging process, because of a lack of deposits and their dependence on market funding,” said Grace Wu, head of China bank ratings at Fitch Ratings Ltd. in Hong Kong.