Chinese banks’ loans to local governments may be 3.5 trillion yuan ($540 billion) more than estimated and the credit outlook for the industry may decline, Moody’s Investors Service said.
“The Chinese audit agency could be understating banks’ exposure to local governments,” Yvonne Zhang, a vice president at Moody’s, said in the report. The “apparent absence of a clear master plan to deal with this issue” may exacerbate problems and lenders may be left to manage a part of the souring loans on their own, it said. Bank shares fell.
The additional liabilities, coming on top of the national audit office’s findings last week of 10.7 trillion yuan in local government debt, may stoke concerns that the banks may be unable to absorb losses on defaults should property prices drop. Non- performing loans may reach as much as 12 percent of total credit, Moody’s estimated.
“This type of negative news will dampen sentiment on the outlook of Chinese banks, particularly on small and mid-sized Chinese banks,” said Banny Lam, an associate director at CCB International Securities in Hong Kong. “The pressure may ease when the Chinese government unveils more details on how these loans could be treated.”
China’s four biggest banks dropped in Hong Kong trading. Industrial & Commercial Bank of China Ltd., the world’s most profitable bank, fell 0.5 percent to HK$5.93 as of 11:25 a.m., reversing earlier gains of as much as 0.7 percent. China Construction Bank Corp., Bank of China Ltd. and Agricultural Bank of China Ltd. also declined.
Risk of Defaults
China’s first assessment of local government debt showed that 79 percent of their liabilities are bank loans and 8 billion yuan is overdue, Auditor General Liu Jiayi said on June 27. The additional 3.5 trillion yuan of loans that weren’t mentioned in that report may be poorly documented and at greater risk for defaults, Moody’s said.
Non-performing loans may reach as much as 12 percent of total credit, higher than its “base case” estimate of 5 percent to 8 percent, the ratings company estimates.
Fitch Ratings lowered its outlook on China’s AA- long-term, local-currency rating to negative from stable on April 12 because of the risk the government would have to bail out banks. As much as 30 percent of loans to local government entities may go bad, accounting for the biggest source of banks’ non- performing assets, Standard & Poor’s said that month.
China’s largest publicly traded banks will be able to absorb credit losses even if 27 percent of their loans to local governments go bad, Sanford C. Bernstein & Co. estimated this week. The central government is also unlikely to let its unlisted policy banks, which are state-owned lenders established to fund government strategies and projects, default on the debt, the brokerage said.
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