This isn’t an estimate about Chinese NPL levels. We and others have gone through that before a few times and, so far, the best guess is basically that they are much higher than the official figures would have you believe.*
And as Pettis notes in his most recent report, “There simply is no way of knowing the extent of unreported losses because there are too many moving parts, not the least of which is the potential viciousness of what George Soros referred to as “reflexivity””. The big point of that being that Chinese entities are most probably not nearly as wealthy as they think they are, a fact they will (also very probably) have to reckon with soon — as failed hopes for future productivity growth run up against NPL-stunted realities.
Or to put it another way, rising bad debt today reduces growth in future economic activity. And, er, slower growth in the future increases bad debt today which is both awkward and probably why estimates of bad debt always seem to rise very sharply over time.
So, this is not about levels. It’s more about doing what Pettis does best — looking at balance sheet structures, incentives in the system and historical examples to give some sort of guide to where China’s banking system and its NPLs are headed. Read more
By Christopher Balding, Professor of Economics at Peking University, HSBC Business School, and blogger at Balding’s World.
One of the major questions facing investors and analysts of the Chinese economy is how to size up credit… or more specifically the non-performing loan risk lurking in the system.
We don’t mean to keep banging on about it. But the bad loans in India’s banking system are both a significant barrier to a new, and badly needed, investment cycle getting properly underway — and a source of some hilarious numbers.
From Credit Suisse’s Ashish Gupta on the Reserve Bank of India (the regulator here): Read more
Let’s start with this from RBS’s Alberto Gallo (click to enlarge):
According to Morgan Stanley’s banking research team, one of the focus areas of the upcoming AQR and banking stress tests is likely to be the definition of a non-performing loan (NPL).
These, as FT Alphaville has noted in the past, vary somewhat radically across Europe.
What’s more, even with recent reclassifications, they’re are still rising: Read more
What could possibly go wrong?
It looks increasingly likely that China is gearing up for another round of bad-loan cleansing with asset management companies seemingly being prepared for some more NPL absorption and a move towards what might be loosely termed market-based approaches to restructurings.
It looks like this will include securitisation, which Chinese authorities have been dipping their toes back into since a Lehman-burning, according to SocGen’s Wei Yao (with our emphasis): Read more
Consider this chart from JP Morgan’s Flows & Liquidity team. It shows the evolution of non-performing loan ratios (as percentages of total loans) across three different Euro area blocks: Germany, core and periphery.
The definition of a non-performing loan (NPL) differs across countries but the picture is definitely not pretty. Read more
The New York Times’ Joe Nocera has spoken to FT Alphaville favourite Laurie Goodman of Amherst Securities Group and is now convinced of the need for principal reductions to clean-up the US mortgage mess.
Nocera’s column on Monday contains some startling statistics from Goodman: Read more
An important question given struggling financial stocks, a stalling US economy, US public sector cuts and concerns over the impotence of QE3. Take your pick, really.
Fortunately it was also a question tackled Friday morning in a special conference call hosted by Nomura’s US banking analyst Brian Foran, Japan banking analyst Ken Takamiya, and Richard Koo from the Nomura Research Institute. Read more
The big holes in Chinese local government balance sheets are back — and bigger than first thought, according to Moody’s.
As widely reported this morning, the rating agency reviewed the National Audit Office’s report on local government debt and concluded that it underestimates banks’ NPL exposure. Read more
A sudden regulatory and accounting push on banks’ “extend and pretend” practices means we’re about to get a peek at one form of renegotiated loans come the third-quarter — so-called Troubled Debt Restructurings.
The Securities and Exchange Commission has been on the case of restructured bank loans since March this year, when it fired off a letter asking financials to clarify their loan modifications. As a reminder, loan mods can change the terms of a loan for a borrower, giving them another chance to make good on the debt, but modified loans do have an unnerving tendency to redefault. In April, the US accounting board announced they’d be firming up rules on how banks account for and report Troubled Debt Restructurings (TDRs). The new guidance is expected to increase the amount of loans reported as TDRs on banks’ balance sheets once it comes into effect this Autumn. Read more
Here’s PricewaterhouseCoopers’ (theoretical) non-performing loan (NPL) barometer:
During the Spanish boom of 2004-2008 the country started construction of about 3.26m new houses, according to Nomura’s figures, and sold about 2.86m in the Costa Brava beach house craze.
By the end of 2009, however, the financial crisis had erupted and left Spain with a stock of unsold houses of almost 700,000. By 2010, the number of new houses being sold had dropped to 200,000. Read more
The first time FT Alphaville stumbled upon China’s local government debt problem, it was in the form of one Shanghai district township snaffling a $250m loan from a Chinese bank for a “high-profile investment.”
Small problem — the township spent the loan, secured using a so-called local government investment vehicle (LGIV) without collateral, on completely unrelated development projects. Read more
Out this Thursday — the latest European bank report from PricewaterhouseCoopers.
In it, the accounting firm estimates the region’s banks have more than €1,300bn of non-core loan assets, which are expected to take at least a decade to run off or dispose of. Complicating matters is the fact that the level of reported non-performing loans (NPLs) at the banks was still rising in 2010. Read more
Why estimating the capital needs of Spain’s savings banks is so damn hard, in a single chart:
For some months now, all the Spanish banking concern has been focused on funding and net margin issues. Worries about loan losses (so 2009) have ebbed away.
On Wednesday, Société Générale’s banking team says it’s time to revisit the issue. Read more
Michael Pettis has a blunt way of describing the China predicament, after Friday saw the People’s Bank raise required reserve ratios for the seventh time over the past year, in an effort to rein in inflation and curb lending by the country’s banks.
In a sentence, it’s “damned if you do and damned if you don’t.” The issue, says the Shenyin Wanguo Securities analyst and all ’round China expert, is that high or just persistent inflation creates “an almost unsolvable problem for the PBoC. Read more
Non-performing loans — those defaulted or nearly-defaulted loans — have naturally grabbed headlines during the US housing crisis. In fact, they tend to be a focus for nearly every bond or bank investor in gauging investment risk. What though of their current counterparts, asks FT Alphaville? Laurie Goodman over at Amherst Securities makes the case this week, that the market is significantly underestimating the default probabilities of loans made to borrowers who have been paying on time — in other words current loans. Read more
Fact du jour — Spanish debt-to-GDP ratios aren’t actually (relatively) that bad.
How are the European bank stress tests like a butterfly?
We think we know — thanks to Deutsche Bank’s take on the Spanish banks’ stress-test results on Monday. Read more
Here’s some reality-based European banking stress to consider ahead of Friday’s theoretical test announcements, courtesy of some results from a Spanish lender.
Step forward, Banco Sabadell. Read more
The non-performing pain in Spain is back in the limelight.
The total stock of non-performing loans sloshing around the Spanish banking system hit €100bn in May, according to data from the Bank of Spain released on Monday. Read more
Here’s an intriguing tidbit from the Bank of Greece’s monthly financial statement for June, released on Tuesday:
Here’s a late addition to FT Alphaville’s collection of unofficial European bank stress tests being put out in advance of the actual certified versions on July 23.
This one’s from Fitch. The test focuses on Spanish banks’ domestic loan books — for which read the country’s cratering real estate market. Read more
The Bank of Spain released the February data for Spanish banks’ non-performing loans on Monday, and the details aren’t pretty.
Like much else in the wreckage of Spain’s pre-recession property boom, the performance of these banks’ loan portfolios is less than reassuring, Execution Noble’s Joe Dickerson notes: Read more