Accroding to the latest figures from the CBRC (China Banking Regulatory Commission), Chinese banks’ asset quality deteriorated as the balance of bad loans continued rising from RMB 492.9 billion in 2012 to RMB 592.1 billion in 2013. However, as banks wrote off significant amounts of bad loans in 2013, the bad loans ratio grew only slightly from 0.95% to 1%, leaving the asset quality in relatively good shape. The largest outstanding bad loans are from the big five banks, who have hit a 10 year peak of bad loans - in total, they have written off RMB 59 billion up significantly from 2012.
The large amount of write-offs prevent the bad loan ratio from growing fast. In addition, Chinese banks have a relatively higher provision coverage ratio, so they are able to write off more. As China is in the middle of an economic transistion, we estimate that banks’ bad loans will continue rising as exports continue to slow and industry shifts excess capacity. Further 2014 write-offs will be supported by the CBRC’s latest guidance.