Are Global Banks in Trouble?

11/06/2013 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

In a matter of just a few days, there were reports on bad bank loans in two of two key global economies and MoneyShow's Jim Jubak explains why he is concerned.

It's just a coincidence, but we're getting a lot of bank bad loan data, first from Europe and then from China, separated by a couple of days. First, we got a report from Pricewaterhouse Coopers, the big accounting agency that looked at all of the European Banks, and basically, what it said, is that, well, you know, bad loans at Eurozone banks have doubled in the last four years and they look like they're continuing to rise, and said Coopers, a lot of banks are sitting on a lot of assets they're calling non-core and they're going to sell those off, about 1.2 trillion euros worth of those to be sold off over the next two, three, four years. Banks have already started, said Pricewaterhouse Coopers. They sold out about 48 billion of those loans in the first six months of 2013. That's more than all of 2012.

What's the point of this exercise for me? Two things; one is that when banks are getting rid of assets, whether they call them core or non-core, it means they're not taking on as much in the way of new loans, so this is a damper on growth. Banks that are worried about their bad loan ratios also don't do a lot of new lending. They want to see those ratios go down, so they're trying to work through those loans without taking on new ones. It's a damper on a fragile European economy. The other part of this is that the European Central Bank is in the process of doing its own audit of European Banks, and their asset positions, and some stress tests, before they take over as regulator for a group of about 200, 250 of the largest banks. The question then is, "So, if we take the Pricewaterhouse Coopers study for face value, saying there are a lot of bad loans, what's the ECB going to do about that?" If they deliver a report that no one believes, it will destroy the credibility even more after the last stress test, so they don't have a whole lot left, so they don't really want to do that. On the other hand, they don't want to make the picture seem so dire that it really slows down growth in the Eurozone. Okay, that was on Monday.

On Wednesday, we had stories about the level of bad loans in Chinese banks--that we've seen enough earnings reports from these banks to be able to put some kind of numbers on it, and what we're seeing is bad loans rise at the industrial and commercial Bank of China, which is the largest bank in the world by market cap. We saw bad loans rise in September at an annualized rate of 30%. Not a pretty picture. What we're also seeing is at some banks we're seeing loans, this is at Bank of Communications for example, we're seeing bad loans rise so fast so they're not making up a huge percentage of assets, but they're rising faster than provisions, so that we saw bad loans at the Bank of Communications rise and provisions for loans as a percentage go down.

These are not good pictures and what's interesting, and sort of a parallel to Europe, is that the Chinese government is in the process of doing an audit, not of the banks, but of local governments and their balance sheets. The local government's got into a lot of lending through affiliated organizations. Unlike the banks, they don't have loan loss provisions. The Beijing central government's budget is their one and only backstop, so this will be very interesting to see how deeply in the hole local governments are. The consensus is that the hole is going to be very, very deep indeed and this, rather than the rising problem of bad loans at banks, is the big problem in China.

This is Jim Jubak for the Moneyshow.com Video Network.

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