China banks' bad loans surge, credit crunch could spread west

HONG KONG Oct 29 (Reuters) - Two of China's biggest banks reported sharply rising bad loans for the third quarter on Wednesday, and one added that a credit crunch squeezing small companies in the country's export-oriented eastern provinces may be spreading westwards.

Bank of Communications Co Ltd (BoCom) and Industrial and Commercial Bank of China (ICBC) reported their biggest quarterly increase in bad loan levels in two years as China's economic slowdown stretched more companies' ability to repay debts.

Earlier this year, the lenders said customers were hardest hit in the eastern regions of the country, reflecting a credit crunch in the powerhouse Yangtze and Pearl River delta regions with their large percentage of private-sector firms that have less access to funds than state-owned peers..

Now, smaller and medium-sized companies in provinces further west may suffer as the funding drought for companies without powerful state backing envelops them, BoCom said. "In the future, the possibility that risks will gradually spread from small and micro enterprises to large and medium enterprises ... and from eastern region and coastal areas of China where risks have concentrated to central and western regions will be intensified," BoCom, China's fifth-largest listed bank, said in its filing.

That confirmed analysts' expectations of a westward expansion of the funding problems for smaller companies in China. "In the second half of this year we're seeing a migration of asset quality problems to western China, as stress migrates along supply chains, and the East Coast / export issues become more of a domestic demand issue," said Josh Klaczek, head of Asia financial services equity research at JPMorgan.

BoCom's third-quarter net profit rose a less-than-forecast 6.3 percent to 14.7 billion yuan ($2.41 billion), while ICBC's net profit climbed 7.7 per cent to 72.4 billion yuan, in line with analysts' expectations.

China's listed banks are expected to report an overall 15 per cent year-on-year drop in revenues for the third quarter, according to Thomson Reuters StarMine SmartEstimates, making them the weakest-performing banking sector in the Asia Pacific region.