Credit risk remains a challenge for Chinese banks in 2018 despite an improvement in bad loan indicators, EY said in a Hong Kong press conference May 15.
At end-2017, the nonperforming loans of 41 listed Chinese banks totaled 1.310 trillion yuan, 56.8 billion more than in 2016, with the weighted average NPL ratio dropping to 1.55% from 1.65% in the prior year, EY said.
The ratios for special mention loans and overdue loans also slid to 2.97% and 2.02% in 2017, respectively, from 3.30% and 2.44% in 2016, the actuarial firm added.
However, despite the drop in these indicators, Chinese banks are not yet out of the woods in terms of credit risk, it said.
"For some listed banks, the balances of loans overdue for more than 90 days were still higher than the NPL balances," Jack Chan, managing partner of EY Financial Services in Greater China, noted in a press release.
According to a 2017 EY report, the ratio of loans overdue more than 90 days to NPLs dropped to 86.72% for all 41 listed Chinese banks. However the firm further noted this ratio remained at a high of above 100% for national joint-stock commercial banks, at 105.98%, and city and rural commercial banks, at 110.90%.
Meanwhile, the balance of special mention loans, an indicator of potential credit risk for banks, remains "huge," Kelvin Leung, a partner of EY Financial Services, Greater China, said at the conference.
"The risk hasn't been completely addressed," said the Beijing-based Leung.
Global uncertainties will also expose soured loans, he added, referring to potential trade conflicts between China and the U.S. Continuing risks from highly leveraged enterprises, among other things, will also add pressure to asset quality.
Meanwhile, the Chinese government has also encouraged banks to raise their NPL levels as a way to curb financial risks, Leung said.
In March, the Chinese banking regulator decided to cut banks' loan-loss provision ratio to as low as 120% from 150%, and provision-to-total loans ratio to a minimum of 1.5% from 2.5%, if lenders classify all loans that are 90 days overdue as NPLs.
As of May 14, US$1 was equivalent to 6.34 Chinese yuan.
