Banks face credit woes as market reform spurs defaults

Mainland banks' credit quality is likely to worsen this year as the government may allow more defaults in a market-driven adjustment to the banking industry and sectors plagued with overcapacity problems, credit rating agency Standard & Poor's said.

"We expect write-offs [in banks] to accelerate [this year] as more loans turn sour," S&P senior director Liao Qiang said. "Higher credit impairment charges [last year] are indicative of deteriorating conditions."

Under the financial reforms in the world's second-largest economy, the government is allowing more flexibility in the system, including the liberalisation of interest rates which may reduce banks' profitability in a less-regulated and more competitive market.

Mainland banks reported their annual results last month, with most seeing increased bad loans and slower profit growth. Overall, they increased the disposal of non-performing loans through write-offs or selling them.

Such disposals jumped an aggregate 165 per cent to 71.3 billion yuan (HK$89 billion), according to S&P.

"We expect some banks to become more active in controlling their non-performing loan ratios through a variety of tools, including write-offs and the sale of bad loans," Liao said.