PricewaterhouseCoopers has fired a warning shot about the quality of assets held by Chinese banks, adding to some recent concerns about debt levels in the world’s second-largest economy.

PricewaterhouseCoopers has fired a warning shot about the quality of assets held by Chinese banks, adding to some recent concerns about debt levels in the world’s second-largest economy.

In its latest temperature check on China’s ten largest listed banks, PwC  says total assets of these institutions stood at RMB85.56 trillion (around $912 billion) at the end of September this year, a rise of 8.73 per cent from a year ago; operating income in the first three quarters of 2013 stood at RMB2.01 trillion, a rise of 12.38 per cent on the same period a year ago.

“In the first three quarters of 2013, the Top 10 Listed Banks realized net profit of RMB862.9 billion, showing a 13.04 per cent year-on-year growth. Net profit grew by 13.50 per cent in the first half and 12.08 per cent in the third quarter which is the lowest among the first three quarters of 2013. Significant slow down in profitability growth rate was attributed to the deterioration in net interest income growth,” PwC said.

Banks covered in the report are Industrial and Commercial Bank of China; China Construction Bank Corporation; Agricultural Bank of China; Bank of China Limited; Bank of Communications Company Limited; China Merchants Bank; Industrial Bank Corporation Limited; China Minsheng Banking Corporation Limited; Shanghai Pudong Development Bank and China CITIC Bank.

“The growth rate in the size of total assets held by China’s top 10 listed banks is slowing down, while the quality of banking assets continues to be a cause for concern, PwC said.

The data, while presenting a mixed set of numbers, may add to worries that the Asian giant’s banking system contains more bad debt than is healthy for the long term and that debt levels in China might presage a sharp correction. Last week, for example, Rothschild Wealth Management, the venerable UK firm, warned investors about the issue of Chinese debt. More positively, other wealth managers such as UBS have issued favourable reports on recent Chinese government proposed reforms for the country’s economy and move towards a more market-based regime.

The data

In its report, PwC said: “Although net interest income accounted for the majority of banks’ operating income, growth in intermediary business income from credit cards, wealth management products, asset custody and other financial services accounted for more than 20 per cent of overall operating income for three consecutive quarters in 2013.”  

“Influenced by interest cuts, interest rate liberalisation, new capital regulatory requirements and other factors, the profitability growth rate of China’s Commercial Banks was relatively low for the third quarter of 2013,” it continued.

The non-performing loan balance was RMB428.3 billion by the end of September, a rise of RMB16.6 billion from June. The NPL ratio grew at a faster pace of 0.96 per cent, compared to 0.02 per cent at the end of June 2013.

More encouragingly, PwC said that the capital adequacy ratio at most listed banks continued to improve from June 2013. Capital accumulation arising from increases in net profits outgrew the risk-weighted assets requirement.

The report noted that the broad money supply growth measure – M2 – rose by a relatively stable 14.2 per cent year-on-year rate in September;