A China bank crisis? Not so fast, Deutsche Bank says

Prominent hedge fund manager Kyle Bass' call that a China banking crisis is imminent is already getting push-back, with Deutsche Bank calling it unlikely and exaggerated.

"We think the article basically referred to a hard-landing scenario, for which our economist only assigns 20 percent probability in 2017-19," China bank analysts at Deutsche Bank said in a note Thursday.

Bass, who is famed as one of the few major investors to correctly call the U.S. subprime housing collapse that kicked off the 2008 global financial crisis, said he expected a China credit crisis that could see the country's banks rack up losses 400 percent larger than the around $650 billion equity hit U.S. banks took during the subprime mortgage crisis.

"Chinese banks will lose approximately $3.5 trillion of equity if China's banking system loses 10 percent of assets," Bass, the founder of Dallas-based Hayman Capital, wrote in the letter to investors dated Wednesday. "Historically, China has lost far in excess of 10 percent of assets during a non-performing loan cycle."

But Deutsche Bank said the note overestimated problematic credit and didn't capture "buffers" against non-performing loans (NPLs), such as previously written off NPLs, excess provisions and the banks' around $1.1 trillion in pre-provision profits.

Rather than China's banks potentially needing $3.5 trillion in recapitalization, "our analysis suggests high-risk credit of US$1.6 trillion (11 trillion yuan) with recap needs of $500 billion (3.2 trillion yuan) under a hard-landing scenario," Deutsche Bank said.

It even noted that the figures cited for China banks' balance sheets needed to be taken with a grain of salt. While Bass correctly noted that China's banking sector had total assets of around $34 trillion at the end of 2015, only around 60 percent, or $20.5 trillion, were credit-type assets, it said.

"The remaining assets are mainly required reserves at the People's Bank of China, interbank deposits/lending, and investment in treasury bonds," Deutsche Bank said.

The banks also have other cushions against any potential crisis scenario, Deutsche Bank noted, such as the 20 percent potential recovery of collateral, with as much as 43 percent of the loan book collateralized.

The PBOC has also recently strengthened its oversight over shadow credit and banks have been boosting risk controls on their wealth management products, the analysts noted.

"We believe several incremental improvements remain underappreciated by the market, including improving credit mix, lower debt burdens and relieved local government debt risks, which make Chinese banks' equity book more solid than before," Deutsche Bank said.

Bass didn't immediately return an emailed request for comment sent outside office hours.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1