Surprise! Chinese Banks Hiding Egregious Losses

This will get very little airplay, until it blows up in spectacular fashion–sinking the entirety of Asia. But, for now, no one will discuss it because it’s boring, somewhat unbelievable, and deemed ‘far fetched’ by people who cannot fathom such malevolent actions by so many people.

“Chinese banks haven’t provisioned for receivables and those are essentially riskier loans,” said Xuanlai He, credit analyst at Commerzbank in Singapore. “The eventual losses will have significant impact on China’s economy because you could have contagion risk in banking sector.”

“The receivables portfolio in Chinese banks is opaque so we can’t make an assumption on the asset quality,” said Christine Kuo, analyst at Moody’s in Hong Kong. “Provisions for receivables are indeed very low compared to that for loans. We tend to think that the Chinese government is likely to provide support if there is any sign of a crisis.”

China CITIC Bank Corp.’s assets under receivables tripled to 900 billion yuan by June 30, from 300 billion yuan at the end of 2013, according to the bank’s financial statements.

Concerns about Chinese banks’ creditworthiness are mounting with the cost of insuring Industrial & Commercial Bank of China Ltd.’s debt against default reaching an all-time high of 199.5 basis points on Jan. 21. The bank’s 6 percent perpetual notes that count as Additional Tier 1 capital fell to a record low of 99.5 cents last Thursday. The yield spread on China CITIC’s $300 million 6 percent 2024 notes surged to a one-year high of 337 basis points over U.S. Treasuries Monday.

Outstanding repurchase agreements in China’s interbank market, used by debt investors to amplify their buying power, soared to 9.73 trillion yuan in December, the highest level since at least 2012, before edging down to 8.1 trillion yuan in January, according to data from ChinaMoney.

Risks are large in the receivables items, said Matthew Phan, credit analyst at CreditSights Inc. in Singapore. “The provision requirement is less strict for such assets, which are typically loans to the property and overcapacity sectors.”

In the latest official data released Monday, the industry’s bad-loan ratio climbed to 1.67 percent from 1.25 percent. New yuan loans in January jumped to a record high of 2.51 trillion yuan as banks front loaded their 2016 lending targets.

“Corporate leverage is rising and around 70 percent of bank loans in China go to corporations,” Moody’s Kuo said. “Until we see corporate leverage and profitability stabilize, we will likely see bank assets continue to deteriorate.”

Official data show nonperforming loans at Chinese commercial banks jumped 51 percent last year to a decade-high of 1.27 trillion yuan amid a stock market rout and the worst economic growth in a quarter century. While Moody’s Investors Service doesn’t expect a banking crisis in China in the next 12 to 18 months, it said in a Jan. 26 note that it does see higher loan delinquencies, more defaults on corporate debt and some losses in wealth-management products.

The NIKKEI 225 is off by 2.3% and the Shanghai is down just 0.16% for the session, thus far.