Upbeat view on asset quality

Chinese bankers are optimistic about future asset quality despite tougher capital standards and lower expectation of profit growth, according to survey results released by the China Banking Association and PricewaterhouseCoopers on Wednesday.

In addition, ambition among the lenders to develop overseas seems untouched, with North America replacing Europe as their favorite destination, the report said.

The Chinese Bankers Survey Report (2012) showed that more than half expected the non-performing loans rate to remain under 1 percent over next three years.

But bankers remain cautious about lending to real estate, local government financing platforms and small businesses, classifying them as major sources of loan defaults, said Jimmy Leung, PwC’s China banking and capital-markets leader.

“With increased downward pressure on the economy, risk factors faced by China’s banking sector gradually increased,” he said.

The survey was conducted from April to June in 31 provinces, municipalities and autonomous regions and received a total of 850 valid questionnaires. The survey also interviewed 25 top Chinese banking executives on site, including directors, vice-presidents, top executives at branch levels and head of departments at head offices.

Leung said it is worth noting that bankers have always focused on the risk of local government financing platforms, although clearing up and standardizing financing-platform loans are resolving some of those issues.

The survey showed that more than 60 percent of the bankers believe that the volume of local government financing-platform loans should be lowered, while 46 percent believe that the risk of such loans will not be severe, but defaults may emerge in some regions.

As it did in 2011, in the context of an economic downturn, the bankers’ biggest concern was credit risk, the report said.

And nearly a half of the bankers forecast regional financial risks will probably turn up in the next five years in eastern areas.

Bad loans have become a major concern among banks and analysts as NPLs have increased for four consecutive quarters ― the longest period of asset-quality deterioration since 2004, when authorities began to release such figures.

Data from the China Banking Regulatory Commission showed bad loans rose by 22.4 billion yuan ($3.59 billion) from July to September to 478.8 billion yuan, and the NPL ratio stood at 0.95 percent by the end of September, up 0.01 of a percentage point from three months earlier.

In addition, the potential risks and issues underlying the rapid development of the wealth-management business have also attracted bankers’ attention.

The survey showed that 51 percent of bankers believe that such products would result in higher levels of off-balance sheet assets, which could affect the asset quality and operational stability of banks, although 80 percent support the development of such business.

About 70 percent of bankers expect that the growth rate of bank revenue and profit over the next three years will be lower than 20 percent, and expanding the scale of interest-earning assets is the most powerful motivating factor for future profit growth.

More than 60 percent said they believe the government should promote interest rate liberalization, a key factor affecting bank profitability, for at least three years.

Ma Weihua, president of the China Merchants Bank Co Ltd, said it’s getting more difficult to replenish capital given current bank earnings levels, and growing pressure from shareholders on dividends.

Du Jinfu, a vice-chairman of CBRC, said on Wednesday: “Banks will continue to suffer from great capital supplement pressure in the next 10 years, if we calculate the credit growth at 12 percent.”

Despite lower profit growth and increasing capital pressure, bankers’ appetite for overseas markets has not changed, with two-thirds saying Chinese lenders should expand their business abroad, according to the survey.

And North America has surpassed Europe as the most popular destination among bankers, with nearly 65 percent saying the region now is their No 1 choice.

Optimism about the US economy might be the explanation. Nearly 73 percent believe US economic growth will remain the same or improve, but 87 percent said growth in the 17-nation eurozone will slow down, or that the bloc will fall into recession.

And bankers were divided into two basically equal camps in terms of confidence in growth of emerging markets.