Nonperforming loans may eclipse the level of 2008

Analysts say soft economy, higher reserves will eat into banks' profits

Chinese banks' bad loans hit their highest point since September 2008 amid the pressure of an economic downturn, and they will continue to rise, making it likely that more low-end, export-oriented manufacturing companies in Jiangsu and Zhejiang provinces will default this year than in 2008, financial experts said.

Nonperforming loans of Chinese commercial banks hit 646.1 billion yuan ($103.7 billion) at the end of the first quarter.

That represents a rise of 54.1 billion yuan from the beginning of the year.

The banks' NPL ratio increased by 0.04 percentage point to 1.04 percent during the same period, said the China Banking Regulatory Commission in an online statement published on Thursday.

The continued slowdown of the economy will make the rise in bad loans unavoidable, said Li Wei, an analyst in the banking sector at China Galaxy Securities.

However, he emphasized that the financial risks are still "controllable".

"The risks are more likely to be exposed slowly rather than having a sudden outbreak," Li said.

"It takes time for China's industrial restructuring to make a positive impact on its economic growth.

In about two years, when economic reform takes effect, the banks will have better control of their nonperforming loans," he said.

Currently, the rise in bad loans has forced banks to set aside more provisions against risk.

That trend is further, cutting into their profits.

By the end of the first quarter, loan impairment reserves of commercial banks had risen by 94.1 billion yuan from the beginning of this year to 1.77 trillion yuan.

The banks' average rate of return on capital was 20.8 percent, falling 0.21 percentage point from the previous year, according to the data of the CBRC.

During an earlier meeting analyzing the economic situation in the first quarter, Shang Fulin, chairman of the CBRC, emphasized that institutions in the banking sector should strengthen their efforts in controlling their NPL balances and ratios.

He said that effort by the bank especially involves strengthening their monitoring of key sectors and areas with high risks, as well as preventing and resolving serious credit risks actively.

The banks have enhanced protection against credit risk and been more aggressive in collecting and writing off bad loans to improve asset quality.

The write-offs increased to 83.47 billion yuan in 2013 from 34.13 billion yuan in 2012.