After years of strong growth, China's biggest banks could face a slump in 2012.
Analysts warned that an economic slowdown could trigger defaults by real estate developers and the increase in bad loans would erode Chinese banks' profitability this year.
"We believe that banks won't be able to avoid a gradual rise in non-performing loans," Beijing-based S&P analyst Liao Qiang wrote in a recent note to clients. "The economic slowdown could temper the growth of China's banking sector and affect its credit performance in 2012."
Chinese banks have been on a lending spree since November 2008 when Beijing unveiled its 4 trillion yuan ($630 billion) stimulus package to rescue the economy from the financial crisis that began that year. The stimulus package led to an explosion in credit to local governments and property developers.
However, as the credit boom ended, defaults began to rise. Bad loans at China's five largest banks advanced to 299.6 billion yuan as of Dec. 31, 2011, compared with 287.9 billion yuan at the end of September, data from China Banking Regulatory Commission showed.
The five banks are Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Bank of Communications and Agricultural Bank of China.
China's domestic economy is slowing and the local property market has started a correction.
China's economy expanded 8.9 percent in the fourth quarter of 2011, the slowest pace in two and a half years. In early March, Chinese Premier Wen Jiabao cut the country's 2012 economic growth target to an eight-year low of 7.5 percent from an 8 percent goal in place since 2005.
In February, new home prices fell in 45 cities of the 70 major Chinese cities monitored by China's National Bureau of Statistics. This was the fifth consecutive month of price decline. Prices of resold homes ceased growing in 59 cities in February, compared with 65 cities in January.
The average transaction price for commercial homes dropped 8.1 percent year-on-year in the first two months of 2012, compared with a 6.9 percent rise for all of 2011, according to data compiled by the Shanghai-based E-house China Research Development Institute.
With both sales transactions and prices falling, financial pressures are building on real estate developers. Such pressures could trigger even more abrupt price declines if cash-strapped property developers are forced to sell inventory to repay their liabilities.
The debt-asset ratios of 37 publicly listed developers rose to 72.3 -- its highest level in 10 years, according to the companies' annual filings. Total debt hit 521.6 billion yuan in 2011, up 37.8 percent compared with the prior year.
Bad loans have already begun to eat into major Chinese banks' profits.
China Construction Bank Corp. (HKG:0939), the world's No.2 lender, said Monday its total non-performing loans hit 7.1 trillion in 2011 -- a 10 percent rise from with the prior year's figure -- mainly due to a deterioration in the manufacturing, real estate and retail sectors.
The rise in bad loans forced the bank to set aside more money in loan-loss provisions, which rose 20 percent against total loan growth of 14.5 percent.
"In 2012, the global economic environment is expected to become more severe and China's economic development faces numerous challenges," the bank said in a statement. "With the influence of weak global economic recovery and domestic economic restructuring, China's economic growth momentum will slow."
The health of China's housing market is crucial to the well-being of the broader economy as real estate investment accounts for about 13 percent of China's gross domestic product and drives demand in about 40 different industries.
Agricultural Bank of China Ltd. (HKG:1288), China's No.3 lender by market value, posted last week its first drop in quarterly profit since listing two years ago.
Net income declined 14 percent to 21.2 billion yuan in the last three months of 2011, from 24.7 billion yuan in the year-ago period.
Agricultural Bank set aside 22.8 billion yuan in loan provisions to cushion against loss in the fourth quarter, which more than doubled the year-ago figure.
Soured debt fell to 87.4 billion yuan at the end of 2011 from 87.9 billion yuan at the end of the third quarter, when the bank had the highest bad-loan ratio among China's five biggest lenders.
The week ahead will be filled with Chinese banks' earnings.
Industrial & Commercial Bank of China (HKG:1398), the world's biggest lender by market value, is scheduled to report its fourth quarter earnings on March 28.
Also reporting fourth-quarter earnings results on March 28 is Bank of Communications Co. Ltd. (HKG:3328).
Just one day later, Bank of China Ltd. (HKG:3988) will come out with its fourth quarter and 2011 full-year earnings report.
Shares of Bank of China Ltd. (HKG:3988) fell 2.22 percent, to close at HK$3.09 a share in Monday trading.
Shares of Bank of Communications Co., Ltd. (HKG:3328) slipped 0.7 percent to HK$5.78 a share.
The stocks of Industrial & Commercial Bank of China (HKG:1398) lost 1.2 percent in value and closed at HK$4.96 a share.
Agricultural Bank Of China Limited (HKG:1288) declined 2.05 percent to HK$3.34 per share.
China Construction Bank Corporation (HKG:0939) dropped 1 percent to HK$5.93 a share.