Chinaâ€™s Banks Arenâ€™t Close to Hitting Bottom

(Bloomberg Opinion) -- This isnâ€™t the bottom for Chinese banksâ€™ bad loans. Be prepared for more and weaker balance sheets..Chinaâ€™s lenders reported large declines in net profitÂ for the first time in decades Sunday, citing dire economic conditions fueled byÂ Covid-19. In preparation to deal with ballooning bad debts and future losses, provisions rose sharply by 656 billion yuan ($95.8 billion)Â for souring loans. Prudent as that may seem, the worst is yet to appear. .Much of this isnâ€™t a surprise. BetweenÂ small enterprises struggling before theÂ outbreak, to the pandemicÂ itself and now the bumpy recovery, these were going to be brutal timesÂ for lenders. The economic gloom cast by the virus has given banks a reason to bring out the worst of their assets. Under new accounting rules, they need toÂ provisionÂ more upfront if they expect thingsÂ to deteriorate.Â It appears they do..Consider whatâ€™s happening with bad debts. The industry regulator has already said that banks will dispose of 3.4 trillion yuan of bad loans this year, up almost 50% from 2019.Â In the first half of 2020, 1.1 trillion yuan were written off.Â Compare that to the 5.8 trillion yuan of such loans culled from theÂ books between 2016 andÂ 2019. In addition, the regulatorÂ saysÂ that about 4% of banksâ€™ troubled debts have been â€œdeferred,â€ equivalent to about 7 trillion yuan of loans headed for delinquency andÂ put on hold untilÂ next year. Â .System-wide non-performing loans rose by more thanÂ 300 billion yuan between January and June this year. Last week, authorities said the value of outstanding non-performing loans for small companies was reachingÂ its tolerance limit at 400 billion yuan, rising 9.25% in the first half,Â but theyâ€™reÂ giving companies and banks room to manage the tough terrain.Â Â .Yet the reality is, bank assets are also growingÂ because Beijing is pushingÂ credit to shore up sentiment and keep companies afloat. Authorities arenâ€™t ready to letÂ the shutters come down on businesses that arenâ€™t viable. At China Construction Bank Corp., the worldâ€™s second-largest lender by assets, for instance, loans to small and medium enterprises grew 31% in the first halfÂ compared to the previous period, or 8% of total loans. These companies were struggling even before Covid-19. Their debtsÂ were at risk and future borrowings may be even tougher to manage. Meanwhile, non-loan assets areÂ rising as shadow banking rears its head again whileÂ regulators delay new rules to rein it in.Â Â .Moodyâ€™s Investors Service expects â€œa considerable lag time before NPL metrics fully capture the increase in loan delinquency pressure.â€Â Weak consumer sentiment and slow recovery from the pandemic will keep the squeeze on bank assets. According to the rating agency, non-performing loans across the $45 trillion banking system rose to 1.94% in the first halfÂ from 1.86% at the end of 2019, â€œled by regional banksâ€ that mainly lend to Chinaâ€™s millions of small businesses..With defaults rising despite forbearance, itâ€™s difficult to see how this is the bottom. For now, thereâ€™s littleÂ trust, with banks trading at multiyear lows in terms of price-to-book value. Maybe itâ€™s the moment to clean up balance sheets and give investors a better look at theÂ books. TheyÂ may actually begin to see the real case for value in Chinese bank stocks..This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal. .Â©2020 Bloomberg L.P.

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Chinaâ€™s Banks Arenâ€™t Close to Hitting Bottom

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