China's non-performing loans on the rise

Chinese banks' non-performing loans (NPLs) will probably exceed 1.5 percent this year, if no appropriate economic stimulus program is adopted, a survey by global financial service provider KPMG survey showed on Tuesday.

According to the statistics from the China Banking Regulatory Commission (CBRC), the NPLs of China's domestic commercial banks for the first quarter of 2015 totaled 982.5 billion yuan ($158 billion), a year-on-year increase of 336.4 billion yuan and an increase of 139.9 billion yuan compared to the end of 2014.

Chinese bank's NPL ratio hit 1.39 percent by the end of this quarter, an increase of 0.35 percent than the previous year.

The overcapacity and economic slowdown in China are the major causes of a dramatic increase in NPLs, according to KPMG's report.

China's overall economic slowdown, the accelerated industrial restructuring, the weakening domestic and overseas demand and the overcapacity in steel and other industries led to increasing financial risks of many enterprises.

These enterprises' operational difficulties, increasing losses and cash flow problems, resulted in a drastic drop in the quality of credit assets throughout the whole banking sector.

"With increasingly severe credit risks becoming common, banks should improve their traditional credit risk management mode, and establish a comprehensive risk management system covering the whole process of assessment and management before, during and after the credit approval," said Wang Lipeng, a partner of KPMG.

The growth of NPL rates at major commercial banks also accelerated in the first quarter in 2015. Among the 16 listed domestic banks that have issued their financial report, Ping An Bank and ICBC saw the biggest growth.

At the end of March 2015, among the 16 banks, the NPL balances of ICBC, ABC and CCB topped the list, totaling 412.8 billion yuan, accounting for 58 percent of the total NPL balances of the 16 listed domestic banks.

The total assets and liabilities of China's banking industry continued to expand in 2014, but the growth rate dropped and there have been adjustments in the asset and liability structure, said KPMG's report.

According to the Report on the Performance of China's Banking Industry published by the CBRC, commercial banks' total assets at the end of 2014 reached 134.8 trillion yuan, an increase of 16 trillion yuan or 13.5 percent compared to 2013, and their total liabilities reached 125.1 trillion yuan, an increase of 12.9 percent.

Earnings continued to increase, but the growth rate dropped as China slowed down its economic growth and lowered interest rates several times.

"As regulators introduced additional capital requirements and net profits increased at a slower pace, the growth of net profits lagged behind that of capital, leading to the decline in commercial banks' average return on assets and average return of equity over the past three years," said Li Shuxian, a partner of KPMG, who is in charge of the financial and auditing sector.