View
388
Download
0
Category
Preview:
Citation preview
Credit Risk in China’s Banking Sector Prepared by Fay Zhou Aug 7th, 2013
A look at our report methodology and purpose
• Findings based on • Secondary research - internal knowledge, government,
vendor and financial institutions’ reports. • Report purpose:
• Identify the current trends of credit risk in Chinese banks • Define the characteristics of credit risk in Chinese banks • Understand Chinese credit risk regulation • Provide Recommendations for banks to improve credit risk
management
2
Section 1: Chinese Bank Credit Risk Overview Section 2: Characteristics of Credit Risk in Chinese Banks Section 3: Credit Risk Management Regulations Section 4: Recommendation to Reduce Credit Risk
Overview - Credit Risk in China’s Banking Sector
4
44.5 46.6 48.5 50.2 51.7 54.62
16.20%
15.70% 15.90%
16.70%
16.10%
17.30%
14.50%
15.00%
15.50%
16.00%
16.50%
17.00%
17.50%
0
10
20
30
40
50
60
2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 2013-Q1
Gro
wth
Rat
e
Tota
l Loa
n B
alan
ce (T
rillio
n Yu
an)
Loan Balance in Chinese Banks, Trillion Yuan
Total Loan Balance Growth Rate (Y-O-Y)
Source: CBRC, 2013
• Chinese banks highly rely on loan business for profits • Credit Risk - the most important risk in Chinese banks • Increase on loan balance => potential credit risk
Overview - Credit Risk in China’s Banking Sector
5
• Upward trend on NPL Ratio from 2012 => Higher risk to receive loan repayment
• Rural commercial banks have highest NPL ratio
427.9 438.2 456.4 478.8 492.9 526.5 0.96%
0.94% 0.94%
0.95% 0.95%
0.96%
0.93%
0.94%
0.94%
0.95%
0.95%
0.96%
0.96%
0.97%
0.0
100.0
200.0
300.0
400.0
500.0
600.0
2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 2013-Q1
NP
L R
atio
NP
L B
alan
ce
Chinese Bank Non-Performing Loan Ratio
NPL Balance NPL Ratio
Source: CBRC, 2013
Overview - Credit Risk in China’s Banking Sector
6
• Provision coverage ratio - the ability that bank possessed against non-performing
• Increased provision coverage ratio => enhanced risk absorbing capability
Source: CBRC, 2013
41.40%
116.60%
153.20%
217.70%
278.10% 295.50% 292.00%
0.00%
50.00%
100.00%
150.00%
200.00%
250.00%
300.00%
350.00%
2007 2008 2009 2010 2011 2012 2013-Q1
Provision Coverage Ratio
Overview - Credit Risk in China’s Banking Sector
7
• Capital adequacy ratio – held capital to meet potential credit, operational, and market risks
• Risk resilience is the ability to control and manage credit risk
Source: CBRC, 2013
8.40%
12% 11.40%
12.20% 12.71%
13.30% 12.28%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2007 2008 2009 2010 2011 2012 2013-Q1
Capital Adequacy Ratio in Chinese Banks
Overview - Expenditure on Credit Risk Management
8
• Forecasted IT spending on credit risk management system (thousand Yuan)
Source: IDC, 2012
2012 2013e 2014e 2015e 2016e
Storage 1108.2 1363.1 1676.6 2062.3 2536.6
Server 779.3 944.5 1144.8 1387.5 1681.6
Network 347 412 490 582 691
Infrastructure Software 194 232 276 329 392
Application Software 355 438 540 666 821
Application Service 445 561 708 893 1126
Section 1: Chinese Bank Credit Risk Overview Section 2: Characteristics of Credit Risk in Chinese Banks Section 3: Credit Risk Management Regulations Section 4: Recommendation to Reduce Credit Risk
Characteristics of Credit Risk in Chinese Bank
• Concentrated Credit Risk in State-owned Banks and in certain industries
• Concentrated credit risk in certain industry
10
Source: CBRC, 2012
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00%
State-owned Bank
Joint-stock Bank
Rural Financial Institutions and Postal Saving Bank
47.30%
16.20%
15.20%
BANK MARKET SHARE (BASED ON ASSET)
Characteristics of Credit Risk in Chinese Bank
• Increasing Shadow Banking System
Ø Shadow banks- financial intermediaries are not subject to regulatory oversight
Ø Size: 22.9 Trillion Yuan (US$3.7 Trillion) ->Increased credit risk
• Non-strict Loan Investigation Ø Unqualified lending – 24.57 Billion Yuan Ø Potential credit risk from unqualified project and firm
11
Section 1: Chinese Bank Credit Risk Overview Section 2: Characteristics of Credit Risk in Chinese Banks Section 3: Credit Risk Management Regulations Section 4: Recommendation to Reduce Credit Risk
Current Chinese Credit Risk Management Guidelines
13
• Guidelines for the Supervision of the Internal Rating System for Credit Risk of Commercial Banks o Purpose – improve credit risk management ability by
establishing an independent and internal credit rating department
State-owned Bank Cooperative Institution Result
ICBC PwC
Internal Rating System Customer Rating
Debt Credit Rating PD and LGD Measurement
Non-retail Credit Rating
BOC McKinsey PD Model Credit Information System
BOC (Hong Kong)
Hong Kong Monetary Authority
S&P
Internal Rating System Default Filter
CCB - Corporate Credit Risk Rating Warning
System Internal Rating System
BOComm Oliver Wyman Internal Rating System ABC Experian Internal Rating System
Current Chinese Credit Risk Management Guidelines
14
• Guidelines on the Measurement of Regulatory Capital of
Specialized Loans of Commercial Banks o Purpose – better regulation of specialized loans
• Guidelines for the Measurement of Regulatory Capital for Credit Risk Mitigation in Commercial Banks o Purpose – define the features, evaluation method, management
process, corresponding information system of credit risk mitigation
Section 1: Chinese Bank Credit Risk Overview Section 2: Characteristics of Credit Risk in Chinese Banks Section 3: Credit Risk Management Regulations Section 4: Recommendation to Reduce Credit Risk
Mitigating Credit Risk in Chinese Banks
16
• Credit Rating System Ø Independent internal and external credit rating system Ø Data collection on loss given default (LGD), and probability of
default (PD) Ø Conduct standard on data quality to enforce the accuracy and
comprehensiveness of business data Ø Implement advanced credit risk measurement model and
internal rating system
Mitigating Credit Risk in Chinese Banks – Collateral
17
Types of Collateral Collateral Eligibility Collateral Management
Cash Fix-Income Securities
Bank Guarantees Equities
Real Estate Convertible Bonds
Commodities
Liquidity Easy to settle Default Free
Recognized Collateral Type
Collateral Valuation Margin calls
Liquidity Risk Monitoring Market Risk Monitoring
Cross-pledged Relations Monitoring
Substitution
Advantages: Reduce credit risk,
Diversification, Improve liquidity,
Higher profits
Disadvantages: Operational risk,
Market risk, Legal risk, Settlement risk,
Valuation risk
Mitigating Credit Risk in Chinese Banks
18
• Application of Credit Derivatives Ø Separate and transfer the credit risk of an asset from one
counterparty to another Ø Reduced credit risk concentration Ø Facilitate credit derivative innovation => improving
comprehensive management Ø Strengthen CDs supervision
• Credit Environment and Culture Ø Eliminate improper operation on loan credit rating and loan
granting
For more information about the topics covered in this webinar or Kapronasia, please visit www.kapronasia.com or send us an email: research@kapronasia.com. Twitter: @chinafintech
Questions and Answers
Recommended