Growing NPLs won't cripple China banking sector, says S&P

China’s banking sector will have a higher non-performing loan ratio in coming years, but good profitability, strong liquidity and adequate capitalisation will enable the major lenders to absorb unexpected credit losses.

Non-performing loans NPLs, the inevitable aftermath of China's unprecedented credit boom in 2009, will increase gradually in the coming years, and the country's less creditworthy local government financing vehicles are expected to suffer the most damage, says Standard Poor's.

But that damage will strain rather than cripple China's banking system. Good profitability, strong liquidity and adequate capitalisation will enable the country's major lenders to absorb unexpected credit losses in reasonably distressed scenarios. However, smaller banks may run into difficulty should economic conditions drastically deteriorate, the ratings agency argues.

We believe China's banking sector will have a higher NPL ratio, with lending to the local government financing vehicles bringing the most risk 30%...

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