Total system credit financing also increased by 71% to Rmb26.7 tn during 2009 and 2010.
These alarming levels are due to massive off-balance-sheet financing, and raises a red flag for future asset quality problems in banks, says Vincent Chan, China strategist from Credit Suisse.
Here’s more from Credit Suisse:
Analysis by our China strategist Vincent Chan shows that during 2009 and 2010, total system credit financing totalled Rmb26.7 tn, representing a 71% jump in total system credit from an estimated Rmb37.8 tn in end-2008 over a twoyear-period. The credit-to-GDP ratio jumped by 46 p.p. from 120% in end-2008 to 166% by Mar-11.
Such a dramatic jump in credit-to-GDP raised a red flag as this is what BIS and the Basel
■ Asset quality the key variable: Connecting the new lending data with decelerating GDP growth, tight liquidity (authorities trying to control inflation) and higher interest rates form the recipe for loan-book stress. We are revising down our loan growth and margin assumptions while ratcheting up credit costs significantly in 2012-13E. Hence, our projected profits are 22% and 38% below consensus and show nil earnings growth for the next three years with ROEs declining to mid-teen levels from 18-21% now.
■ Downgrading China banks to UNDERWEIGHT, ABC to UNDERPERFORM and BOC to NEUTRAL (from OUTPERFORM): ABC has outperformed and has the potential for greater impairment on its county lending book. BOC may also suffer a larger impairment due to the scorching 49% loan growth (domestic loans up 56%!) in 2009. We have revised down our target prices using average 2012-13E ROEs, which are now lower. ICBC remains our top pick among China banks. While the anticipated supply of equity would be a dampener to bank stocks, a government carve-out of LGFV bad loans would be positive.
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