Half of forborne loans will be normalised by 2021 and largely resolved by 2023.

China’s GDP recovery, along with moratoriums and write-offs will restrain lenders’ bad loans, according to a S&P Global Ratings report, with forborne loans likely to be largely resolved by 2023.

The non-performing asset ratio for commercial banks is expected to drop to 4.4% by 2023, largely in line with the 4% level in 2019. The updated end-2020 NPA estimate is 7.3% for commercial banks and 8.1% for the sector level, shrinking by 40 basis points.

About half of forborne loans will normalise in 2021 with the cure rate declining in later years, with forborne loans comprising 3.5% of commercial banks’ total lending by end-2020. Write-offs will likely hike significantly in 2023 as remaining loans are reclassified and resolved, the report said.

In addition, their reported NPL ratio at end-2020 should be broadly flat or slightly improved compared with 2019 mainly largely due to loan growth, a large-scale disposal of bad debt, and heavy write-offs.

"Chinese commercial banks have maintained robust levels of reserves over reported NPLs and in our view this is likely to remain well above 150% over the next two to three years," said credit analyst Ryan Tsang.

"More importantly, such level of provision would mean the commercial banks as a sector keep a reasonable level of protection to cover potential risks from their special mentioned loans, forborne loans, and other questionable credit exposures, in addition to NPLs," he added.