Non-Performing Loan Statistics
• Non-performing Loan Ratio Relatively Low: Many of the banks above have low non-performing loans relative to the size of their assets—many ratios are close to or below 1.00%. To put this in perspective, the five largest U.S. banks have an average NPL ratio of 1.78%.2
• Allowance to Loan Losses Relatively High: The Chinese banks also typically have a high amount of allowances, in the range of 3% of total loans—which is about 3x their NPL ratios. To put this in perspective, the five largest U.S. banks have an average allowance amount of just 1.65x.2 Chinese banks thus have a greater cushion in terms of already provisioning for larger loan losses.
• Asset Quality Discussion: I have discussed this asset quality question with Tracy Yu, a China financial analyst for Deutsche Bank. Her cash flow analysis of the Chinese banks suggests that NPLs are not being underreported. Her analysis showed:
o Cash Increase Matches Profit Increase: The increase in pre-tax profit of the H-Share-listed Chinese banks
from 2007 to 2012 was matched by their net increase in cash. This indicates that the loans performed as
expected and the Chinese banking profits were not accomplished through accounting gimmicks. If NPLs were
underreported, one would expect net profits to be higher than increases in cash.
o Another piece of evidence Tracy pointed to was the amount of interest income that comes from accruals
instead of cash payments: only 46 basis points of assets—which is better than comparable ratios in other
emerging markets such as India or Indonesia.
o Wealth management products (WMPs) are a source of concern, yet recent disclosure suggests that two-
thirds of the WMPs are invested in fairly conservative assets that are liquid. Only one-third of WMPs are
invested in riskier, less liquid assets, and these represent only 2.2% of total banking assets.