While non-performing loan (NPL) ratios have crept up in the Chinese banking sector, recent results reflect some stabilization, said David Marshall,CreditSights's analyst for Asia-Pacific banks.
Marshall noted that the rise in NPL levels was far from that predicted by the International Monetary Fund, which estimated in an April report that the proportion of total commercial lending that was "potentially at risk" was 15.5 percent.
Last week, three of China's top five banks reported their half-yearly results.
The Agricultural Bank of China reported an NPL ratio of 2.4 percent at the end of June, up just 0.01 of a percentage point since the end of last year. Bank of Communication's NPL ratio edged up to 1.54 percent from 1.51 percent and China Construction Bank's NPL ratio rose to 1.63 from 1.58 over the same period. The Bank of China and Industrial and Commercial Bank of China will report earnings later this week.
"There are signs that the asset quality deterioration is slightly stabilizing so in the very short-term, there are signs that the banks performance isn't deteriorating so rapidly but that underlying concern is still there: Where are those bad loans?" he asked.
It is likely that the losses will be more evident over a number of years with the losses shared by the central and regional governments, as well as banks, he added.
While the banking sector was unlikely to implode like in Japan given China was at a different stage of economic development, the Middle Kingdom still has to figure out how to move forward.
"The key thing ... is that they haven't figured out how to maintain economic growth without constantly piling up more and more debt levels which represent potential bad loans for banks in the future," he said.
Still, while financial institutions were grinding out smaller profit growth, their return-on-equity ratios were still impressive, said Marshall.
The reported banks results all translate to return on equity of mid to high-teens, which are "some of the highest levels of profitability of any banks in the world," he said.