Currencies

Dollar rises as markets turn eyes to Opec

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members. Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in […]

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Banks

Basel Committe fail to sign off on latest bank reform measures

Banking regulators have failed to sign off the latest package of global industry reforms, leaving a question mark hanging over bankers who complain they have faced endlessly evolving regulation since the financial crisis. Policymakers had hoped to agree the contentious new measures at a crunch meeting held in Chile this week, but a senior official […]

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Financial

Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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Economy

Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Financial

Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Categorized | Banks

Official data mask China’s bank problems


Posted on August 31, 2014

China’s official bad-loan ratio looks benign at 1.08 per cent, but few analysts believe that figure reflects the true magnitude of lenders’ asset-quality problems.

The share of non-performing loans in Chinese banks is almost certainly well below the officially acknowledged peak of 25 per cent reached in 1997, but estimates of the true ratio remain a topic of speculation.

    The problem is that banks can employ a variety of methods to disguise their bad loans. The most common is simply to roll over debt. A bank that does not want to recognise a bad loan may offer a new loan to repay the maturing one.

    “In situations where big borrowers are having problems repaying, the banks don’t want to make things worse by restricting liquidity, so they are finding ways to re-lend and extend,” says a senior bank adviser in China.

    “Technically, it should not be do-able, but so much of the lending in recent years is considered political, so inspectors and regulators often allow leeway if they think the borrower is systemically important and could eventually get out of trouble.”

    The International Monetary Fund says that a loan should be classified as non-performing if principal or interest are overdue for 90 days, or if overdue interest has been rolled over into a new loan.

    Yet banks can skirt this requirement by leaving a gap of a few days between the old and the new loan. In such cases, a corporate borrower may access the high-interest informal lending market to raise cash to repay the maturing loan. After a few days, the bank issues a fresh loan that the borrower uses to repay the underground loan.

    Annualised interest rates on informal loans can be 40 per cent or more, but the high rate is still manageable since many such loans are only for a few days.

    Banks can also disguise bad loans by classifying them as “special mention”, a designation used for loans that are questionable but not yet non-performing. At Industrial and Commercial Bank of China, the country’s largest lender, Rmb231bn loans are classified as special mention, equal to 1.98 per cent of all loans and more than double the Rmb106bn labelled as non-performing.

    Even if the official NPL figure understates the amount of bad loans, the trend is still indicative. The official NPL ratio is at its highest level since March 2011, and bank executives themselves say they expect it to keep climbing.