3 in 5 Chinese bankers expect NPLs to peak in a year or two

They still believe that NPLs have not been fully exposed.

PwC launched the 8th Chinese Bankers Survey (2016) Report, which tracks developments of China’s banking sector from the perspective of a group of bankers.

The Report was jointly published by PwC and the China Banking Association (CBA). Dr. BA Shusong, project leader and the Chief Economist of the CBA, together with the project team, interviewed 15 senior bankers to get their insights into the sector. With a total of 1,794 valid responses collected, the survey sampling process has taken into account participants’ geographical regions, grades, types of financial institution, and if the institution is listed on stock exchange(s) or privately held.

Here's more from PwC:

China reported a stable GDP growth of 6.7% in 2016. Yet most bankers revised their growth forecasts downwards compared to one year ago, with 78.7% of interviewees believe the country’s GDP growth to stay at a range between 6.0% to 7.0% over the next three years (In 2015, 85.1% of bankers expected the GDP growth to hit within 6.5% to 7.5%).

As China’s economy enters the “new normal” development phase, the “supply-side reform” remains high on policy makers’ agenda. In response to the supply-side reform, over 80% of bankers in the survey believe they should adjust the loan portfolios and support emerging industries. “Banks should launch a variety of products and services to support the central government’s initiatives, such as the scheme to investment-loan linkage, debt-for-equity swaps, and green finance,” says Richard Zhu, PwC North China Financial Services Leader.

In 2016, the credit asset quality of Chinese banks continue to face strong headwinds, with rising non-performing loans (NPL) balances as well as ratios. Despite the fact that NPL balances and ratios continue to deteriorate, 69.5% of bankers still believe that NPLs have not been fully exposed, with 61.4% of bankers expect NPLs to peak in one year or two.

“While increasing efforts on NPL disposal through conventional approaches such as write-offs, collections and transfers, Chinese banks are also actively exploring a diversified range of alternatives, including NPL securitisation, cooperating with the big four asset management companies (AMCs), and transferring of usufruct transfer of credit assets,” says Vincent Yao, PwC China Financial Services Partner.

This year’s survey gives more focus on Fintech (or “internet finance” in China’s context). It was clearly stated fact that bankers continue to attach great importance to internet finance in 2016, with half of interviewees committed to put internet finance as high priority and willing to increase investment on this particular sector. In addition to the promising opportunities ahead, over half of bankers in the survey considered information technology as top risk when developing the new system for internet finance business.

In light of a more challenging and complex external environment in 2016, bankers’ expectations on revenue and after-tax profit growth over the next three years are lower than previous years, with credit asset quality being the most concerned area. Nearly 90% of them forecast the growth of revenue and after-tax profit to be lower than 15.

Over 60% of bankers predict their NPL ratios to rise above 1.0% in the next three years. To conclude, Richard Zhu says, “Banks should place the improvement of risk management as top priority”.