China banks' bad loans jump by most in 8 years

SHANGHAI/BEIJING, Nov 13 (REUTERS) - Bad loans held by Chinese banks rose by the largest amount in eight years in the third quarter, adding to concerns about excessive debt as the world's second largest economy slows.

Bad bank loans outstanding rose by 24.1 billion yuan (S$4.9 billion) to 563 billion yuan at the end of September, according to the China Banking Regulatory Commission. That marked the largest quarterly rise in the volume of bad loans since the fourth quarter of 2005.

Due to swift overall loan growth in the third quarter, however, Chinese banks' non-performing loan ratio ticked up only slightly. The system-wide NPL ratio reached 0.97 per cent from 0.96 per cent from the end of June, the commission said.

Analysts widely believe the official NPL ratio understates the true extent of bad loans on Chinese banks' balance sheets.

Independent estimates for end-June 2013 range from one to five per cent.

Economists expect bad loans to rise further as growth slows and some loans, that were granted during a credit-fuelled stimulus plan launched at the height of the global financial crisis in 2008, turn sour.

Chinese regulators are encouraging banks to raise fresh capital in order to strengthen their ability to absorb bad loans. Last week they announced new rules allowing commercial banks to sell special loss-absorbing subordinate debt on the country's stock exchange.

But, the latest figures also show that banks have become less cautious in setting aside provisions to bad-loan losses.

The ratio of loan-loss provisions to overall loans dipped to 287 per cent at end-Sept, the lowest ratio since end-2011 and down from 293 per cent at end-June.

Bank analysts noted last month that many banks had reduced provisioning in order to boost reported net profit.

The biggest rise in bad loan ratios occurred at mid-sized banks, whose overall ratio rose from 0.83 per cent from 0.80 per cent. China Merchants Bank , China's sixth largest lender, reported last month that its NPL ratio rose to 0.79 per cent at end-September from 0.71 per cent at end-June.

The weighted-average capital adequacy ratio of Chinese banks was 12.18 per cent at the end of September, down from 12.24 per cent at the end of June, the CBRC said in a statement on its website. But average core tier-one capital ratios rose slightly to 9.87 per cent from 9.85 per cent.