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With the long and stiff adjustment of the economic structure, risks of capital chain of enterprises represented by overcapacity industries continue to expose. The quality of credit assets of commercial banks correspondingly deteriorates at faster speed.
As a result, non-performing assets keep arising, and the market size of non-performing assets disposal has been expanding. Institutions estimate that the market size of non-performing assets disposal is expected to reach about 1.5 trillion yuan in 2016.
Tension: enterprises in overcapacity industries suffer the highest risk
In this cycle of economic adjustment, capital chain of enterprises in overcapacity industries was the first to have been impacted, and caused a lot of financial risks.
According to the statistics of Wind, by the end of June, 18 bond issuers in China have defaulted, involving 36 bonds and a principal of 20 billion yuan. Caitong Securities indicated in its report that the number of default events occurred up till now during the year has exceeded the total of the previous two years. That means there were defaults in all kind of bonds. In particular, private sector has seen the most defaults, and it was followed by central and local SOEs. Most of these enterprises are in the middle or upstream industries that are highly cyclical. At the same time, Wind’s statistics also show that 105 events have occurred so far this year where credit rating or rating outlook of corporations was downgraded. Overcapacity industries still face huge pressure.
Under the pressure from operating losses and over-debt, the capital chain of overcapacity industries has been tight. Take the coal industry for example, data from China National Coal Association shows that over 90 percent of large coal enterprises has recorded losses in 2015, and the total profits of the industry was just 44.1 billion yuan, only ten percent that of 2011. While the total liabilities increased by 10.4 percent year on year to 3.68 trillion yuan. The total liabilities of 90 large coal enterprises reached a startling 3.2 trillion yuan. Wind’s data also shows that as of the end of the first quarter, the average debt-to-assets ratio of 39 listed coal enterprises is 59.16 percent, and ten of them exceed the warning line of 70 percent.
It is worth noting that the redemption at maturity on the domestic bond market will hit record high, and the peak will come in the second half year. According to the statistics of Wind, 2.72 trillion yuan corporate credit bonds will be mature for redemption or need to be paid in advance, higher than 2.53 trillion yuan in the first half year. Redemption will concentrate in August and November, with 493,040 million yuan and 473,550 yuan respectively, up 34.6 percent and 15.3 percent from the corresponding periods of last year. Statistics of UBS shows that in overcapacity industries such as iron and steel, the peak season of maturity of bonds will come in August, with the amount totaling about 80 billion yuan, and in October and November, the figure will reach about 90 billion yuan.
“Though the credit events have not broken out in large scale, it actually has released gradually, such as Evergreen Holding Group and Special Steel Group, whose defaults have not yet resolved, and Sichuan Coal Industrial Group, which has invoked concerns over regional risks. And the intensive downgrading of bond issuers in overcapacity industry has never seen before. So our view remain unchanged, that is, credit spread will expand in the near term. It is highly possible to happen from July to August, when overcapacity industry and high-risk bonds reaching the periodic peak for redemption.
Rising: NPL ratio remains high for banks in certain regions
As China’s banking industry can hardly independently weather the volatility of economic cycles and deterioration of enterprises’ operating performance, its quality of assets also declines. Data released by the China Banking Regulatory Commission (CBRC) shows that by the end of the first quarter of 2016, both the balance and ratio of non-performing loans (NPLs) of commercial banks continue to rise on a quarterly basis. The balance of NPLs of commercial banks was 1,392,100 million yuan, up 117,700 million yuan from the previous quarter; the NPL ratio of commercial banks was 1.75 percent, increasing by 0.07 percentage points from the end of last quarter, and it has risen for the 18th consecutive quarter. Wang Shengbang, deputy director of the prudent regulation bureau of CBRC, indicated at the press briefing hosted by the State Council Information Office earlier that the NPL ratio is climbing up from a very low level. In the new round of reform on state-owned banks over the past few years, the NPL ratio of commercial banks ever dropped to as low as 0.9 percent, and now, it has nearly doubled, reading 1.75 percent. Wang also said that commercial banks have disposed about 2 trillion yuan NPLs by the means of appropriation and elimination.
Industry insiders indicated that though the credit risks of commercial banks are overall controllable, but regional financial risks should not be ignored. Particularly, it has become increasingly apparent that regional financial risks are transferring from the Yangtze River Delta to middle and western provinces.
According to the latest statistics released by banking bureaus in various regions, NPL ratio in banking industry still climb in Guizhou, Guangdong, Zhejiang, Shandong and other provinces as of the end of the first quarter this year. In addition, the NPL ratio in Jilin and Heilongjiang provinces record 3.53 percent and 3.5 percent respectively. Quality of banking assets in Shanxi and Inner Mongolia is also worrying although public data hasn’t been disclosed.
Taking Shandong province for example, Ji Yulu, general manager of Shandong Financial Assets Management Co., Ltd., indicated that the NPL ratio of banks in Shandong province keeps growing in recent years and loan migration rate increases continuously with more than 200 trillion yuan at the verge of NPL. The economy hasn’t hit the bottom and Shandong is a major province gathering manufacturing, heavy industry and iron and steel industry, so it is stricken severely, said a staff from a commercial bank’s branch in Shandong.
“At the early beginning, regions with distinct characteristics of export-oriented economy were hit most by external shocks and suffered NPLs at the earliest. But with adjustment in industrial structure, risks gradually spread from downstream to upstream such as manufacturing and resource industry. Financial risks began to expose gradually in provinces of Midwest China or resource-industry-oriented provinces. This shows the process of conduction of economic chain.” said Zeng Gang, a senior researcher at the Chinese Academy of Social Sciences' Institute of Finance and Banking.
Expansion: market size of disposal of non-performing assets to enlarge
Industry insiders indicated that as the economic structural adjustment has not finished yet, this round of NPL does not end.
In terms of non-financial enterprises, enterprises’ credit spread is enlarging, indicating that enterprises’ debts are hiking and credit risk will be continuously exposed. But regarding financial enterprises, the NPL ratio is estimated to continue to rise to around 1.8 percent as listed banks faced greater operation pressure in the second quarter, according to Report on Global Banking Industry Outlook for the Third Quarter of 2016 recently released by International Financial Research Institute of Bank of China. The Report predicts that growth rate of assets and liabilities of China’s listed banks will experience a further slowdown, partial risks will be exposed faster and NPL ratio will move up slightly to about 1.9 percent.
A joint-stock commercial banker said frankly that currently banks’ NPLs hasn’t been fully exposed. “Generally speaking, banks usually estimate provisioning coverage for a year. Once budget for provision exceed expected due to too many NPLs, banks will find ways to make the NPLs of the year undisclosed temporarily.” The banker stated that “Some banks allow the third-party enterprises to carry on the loans, so the NPL may turn to be normal in the future. But sometimes, although some banks clearly know the bad situation of enterprises, they still continue to provide them with small loans and require them to conduct closed operation on capital, aiming to receive certain interests. But under this backdrop, this loan is only not included in NPL for the moment.”
The estimation statistics previously released by Guotai Junan shows that by the end of 2016, the NPL balance of commercial banks will reach 2.1 trillion yuan, non-performing assets of trust industry will register 470 billion yuan, non-performing assets of non-financial enterprises will reach 6.3 trillion yuan, and about 1.5 trillion yuan of non-performing assets is expected to be input into the market for disposal in 2016.
“NPLs of multi guarantee circles in Shandong went up continuously last year. If one guarantee circle bore 10 billion yuan of NPL, there are more than 100 billion yuan of NPL in Shandong now. In addition, there are risks in debt of local government, social illegal fundraising and Internet-based loans, which also leaves potential for the disposal of non-performing assets.” said Ji.
“At present, the supply of disposal of non-performing assets is huge, but institutions which can participate in the market are quite limited. The market potential will further expand if regulators further relax the restriction in the future.” indicated by Zeng.
(APD/XH FINANCE)
