Top banks weighed down by overdue loans

Bad loans are weighing heavily on China's top commercial banks this year, and are likely to hit profitability and asset quality, a report released by PwC claimed on Thursday.

The study revealed that total overdue loans among the country's top 10 listed banks had increased to 486.5 billion yuan ($79.3 billion) by the end of last year, up 29 percent from 2011.

The average overdue loan ratio rose to 1.21 percent from 1.06 percent, "a considerable deterioration", said Jimmy Leung, PwC's banking and capital markets leader for China.

In some regions, the ratio reached 5 to 7 percent, he added.

The ratio of special-mention loans, debts that could potentially turn sour, among the five largest joint stock banks rose to 1.03 percent in 2012 from 2011's 0.93 percent.

Chinese banks follow the international five-category system that classifies loans as "pass", "special-mention", "substandard", "doubtful" and "loss", in line with their inherent risks. The last three groups are regarded as non-performing loans.

The overall percentage of NPLs among the top 10 banks stood at 0.82 percent by the end of 2012, up 0.01 percent from the previous year, said PwC. The overall NPL balance amounted to 376.2 billion yuan, increasing by 24.9 billion yuan from a year earlier.

"The economic uncertainties and tightened rules on the real estate market would pose a tougher test for commercial lenders this year," added Raymond Yung, PwC's financial services leader for China.

"If property prices show big declines, bank lending would be in jeopardy."

Yung said the operating environment for Chinese banks continued to be difficult in 2013, and effective risk management continues to be a challenge as macroeconomic contractions continue to exert pressure on loan assets held by the banking sector.

"It's time for Chinese banks to strengthen their management of collecting repayments, and writing off more soured loans more positively."