China's tightening monetary policy may lead to a rebound in bad loans which will erode banks' profitability, Standard & Poor's said yesterday.
The Chinese banks may see their non-performing loan ratio climb to 5 percent to 10 percent in three years if "lending rates rise significantly and government support for project loans wanes," S&P said in a report.
China shifted its monetary policy from accommodative to prudent this year to curb inflation, and has unveiled a spate of tightening measures since October. It also has raised interest rates four times since October, with the one-year savings benchmark rate now at 3.25 percent.
Meanwhile, the People's Bank of China has raised the reserve requirement ratio five times this year, or 11 times since 2010, to force banks to freeze more funds from lending. Big banks in China now face a 21 percent ratio - a record high.
"These measures, and other efforts to contain credit risks, could noticeably weaken the profitability of the banking sector in China," S&P said in the report. "Non-performing loans have no way to go but up."
Still, S&P maintains its "stable" outlook for the banking sector because of the lenders' asset quality, profitability, liquidity and capital.
The official NPL ratio of Chinese banks dropped to 1.2 percent at the end of 2010 from 24 percent in 2002.
Despite the current low NPL ratio, warnings about bad loans rising are not unfamiliar.
Andrew Colquhoun, head of Fitch Ratings' Asia-Pacific sovereign debt unit, cautioned last month that it's "not inconceivable" for Chinese banks' bad debt ratio to reach 30 percent, which would obviously be "negative" for China's sovereign rating.
Fitch said in April there was a "high likelihood of a significant deterioration" in banks' asset quality after banks in China lent a record 18 trillion yuan (US$3 trillion) in the last two years.
Fitch cut its outlook on China's AA- long-term local-currency rating to negative from stable, the first time in 12 years it has seen a cut.