VALUATIONS of Chinese banks at near-record lows are not as “cheap as they look” because of an increase in nonperforming loans and risks of write-offs, according to Templeton Equity Group’s Norman Boersma.

    Shares of China’s largest State-controlled banks have fallen 1.2 percent on average this year in Hong Kong, compared with a 0.6 percent decline for the benchmark Hang Seng Index.

    “They’re getting cheap, but they’re not as cheap as they look in the headline figures,” said Boersma, chief investment officer at Templeton, which manages US$130 billion in assets globally. Provisions for bad debt need to rise, and “when that happens, you basically lose your earnings.”

    Chinese banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating borrowers are struggling amid an economic slowdown.

    That bad debt ratio may rise to 1.5 percent of total loans, the highest since December 2009, from 1.04 percent as of the end of March, if momentum continues to wane and slumping property prices hurt companies linked to the sector, according to a May 16 forecast by Bank of Communications Co.

    As China’s gross domestic product expansion slowed, combined profit growth at the four major banks — Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. — decelerated to 12 percent last year from 15 percent in 2012.

    China’s economy expanded 7.7 percent last year and in 2012, the weakest pace since 1999 in the aftermath of the Asian financial crisis and down from an average 10.6 percent in the previous decade. Growth may ease to 7.3 percent this year, according to the median estimate of 51 analysts in a survey last month.

    “The issue with the banks is the magnitude of the write-offs,” Boersma said. “We know that there are loans in there that aren’t going to get repaid.” (SD-Agencies)