Corporate NPLs: Views from another angle
? We estimate that China’s ‘stressed’ corporate NPL ratio rose for the fifth
consecutive quarter in 1Q22 to 10.8% of corporate loans (4Q21: 9.7%).
? This estimated ‘stressed’ corporate NPL ratio is rising at the fastest rate since
2015/2016.
? A combination of risk aversion and weak underlying credit demand continues
to result in quality loan remaining near multi-year lows, in our view.
? Retain sector Neutral. Top pick remains CMB, BOC, PAB & CITIC.
1Q22 ‘stressed’ corporate NPL ratio
A common question we get asked by investors who have doubts over the reported nonperforming loan (NPL) ratios of China banks is: What is the ‘true’ NPL ratio? Our bottomup independent assessment of listed corporate’s ‘stressed’ corporate NPL ratio suggests
it was 10.8% in 1Q22 vs. 4Q21’s 9.7% (Fig. 1), with its sixth month rise the largest since
2015-2016 (Fig 7). This metric has been rising for three consecutive quarters.
A superior metric to reported NPL ratios in our view
‘Stressed’ corporate NPL ratio is also a superior metric to the corporate NPL ratios
reported by banks, in our view, as it is a gross metric, rather than a net NPL ratio (i.e. net
of write-offs, transfers, NPL sales and securitisation). Hence, it gives a better indication of
NPL formation rates. It also provides an alternative asset quality indicator, given investor
scepticism over the low bank-reported NPL ratios, especially relating to corporate loans,
which was only 2.07% and fell both hoh and yoy in FY21 (Fig 3). Our metric is a function
of both leverage ratios and debt serviceability ratios (i.e. interest expense over EBIT). It is
derived from a bottom-up analysis of the fundamentals of over 3,700 listed A-share nonfinancial companies (see Peering through the corporate looking glass, 11 May 2021).
A useful early warning of potential NPL (e.g. property developers)
We believe this metric can be a useful early-warning indicator as to which industries are
facing asset quality stress. For example, our estimate of the ‘stressed’ corporate NPL
ratio for property developers rose from 6.5% in Dec 2019 to 9.3% in Dec 2020 to 18% in
Dec 2021 and 18.2% in Mar 2022 (Fig 8) (See Corporate credit quality: Under the X-ray,
11 May 2020), which would have been a useful predictor of the rise of NPL ratios the
banks reported within this segment in FY21. The transportation, storage and postal
services sector is another industry that is still experiencing elevated stress from the
impact of the Covid-19 pandemic. Both the Construction and the Production & supply of
electricity, heat, gas & water industries seem to be experiencing notable rises in asset
quality stress.
Top picks: CMB-H, PAB, CITIC-H & BOC-H
We maintain a Neutral rating on China’s banking sector. We value the banks using a
stress-test adjusted GGM. Upside/downside risks: better-/worse-than-expected economy
and increase/decrease in policy risks.