Top State banks' asset quality weakens in H1

Tough conditions have led to defaults by some medium-sized and large enterprises whose business relies heavily on natural resources, Lian said.

Financial risks are also spreading quickly among micro-sized and small enterprises in certain regions. Mutual loan guarantees among small businesses can easily have a ripple effect if the risks are not quarantined, Lian said.

Study identifies worst sectors for NPLs

Nonperforming loans may eclipse the level of 2008

For some commercial banks, special-mention loans (potentially weak loans for which there may not be sufficient documentation, for example) also increased significantly in the first half. At Bank of Communications Co, such loans hit 74.6 billion yuan on June 30, up 26 percent from Dec 31 and up 14.8 percent year-on-year. Those rates were far higher than the single-digit growth in total loans during the corresponding periods.

"Commercial banks are still facing downward pressure in terms of asset quality. Their bad loans will keep growing for at least six to nine months due to the lagging effect of increases in special-mention loans," Lian said.

He estimated that NPL ratios are likely to climb to a range of 1.14 percent to 1.19 percent at the end of this year.

Commercial banks accelerated NPL write-offs. In the first half, 16 banks listed in the A-share market wrote off bad loans worth 71.05 billion yuan, which was close to the amount of 83.25 billion yuan for the whole year in 2013.

Five major State-owned banks accounted for the largest proportion of write-offs, or 46.91 billion yuan.

The banks will make greater efforts to resolve and write off bad assets in the rest of the year, Lian said.

With both bad loans and NPL ratios increasing in the first half, net profit growth for three major State-owned banks - the Industrial and Commercial Bank of China, China Construction Bank and Bank of Communications - fell to single-digit levels.

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