Share prices of listed commercial banks fell Wednesday on market concerns that the non-performing loans (NPLs) of Chinese banks will rise substantially amid a slowing economy.

China Merchants Bank and some regional banks including Pudong Development Bank saw their shares drop by more than 2 percent, compared with a 1.1 percent drop in the Shanghai benchmark composite index Wednesday.

The outstanding NPLs of Chinese commercial banks totaled 456.4 billion yuan ($72 billion) by the end of June, a rise of 28.5 billion yuan over the end of last year, and 18.2 billion yuan over the first quarter of this year, according to statistics released by the China Banking Regulatory Commission Wednesday.

Yet the overall NPL ratio, measuring bad loans against lending assets, was only 0.9 percent by the end of June, flat with the first quarter and 0.1 percentage point lower than the end of 2011, due to the growth in new loans.

However, many banks have classified problematic loans under “special mention” rather than NPL. Therefore, the official NPL ratio looks better, said Liao Qiang, director of financial institutions ratings for Standard and Poor’s in Beijing.

“The overall profits of business is down due to the sluggish economy and many have even suffered severe losses, and their shrinking cash position is making loan repayments difficult,” Liao said, adding there will be more “special mention” loans to be reclassified as bad loans.

“The possibility for the NPL ratio of commercial banks to attain 2 percent by the end of this year is fairly high,” Liao said.

Recently there have been numerous reports about massive bankruptcies in Wenzhou, Zhejiang Province, and a growing private lending crisis has led to rising default on loans of commercial banks.

New NPLs rose by 20.5 percent in the first half of this year, and mainly came from Wenzhou and Hangzhou, according to the newly released mid-year financial report of Pudong Development Bank. Industrial Bank and Huaxia Bank all reported rising NPL ratios in their mid-year reports.

There will be further disclosures of bad loans as more banks announce their mid-year performance, the 21st Century Business Herald reported.

The increase of NPLs among commercial banks ranked the biggest financial risk during the economic slowdown, according to an editorial in the Financial News under the central bank.

The NPL ratio of banks in Wenzhou reached 2.69 percent by the end of June, the highest in a decade, according to the Wenzhou banking authorities.

Bank profits will be eroded as they need to set aside more provisions against rising NPLs, and the bank’s profit margin will narrow gradually in view of the cuts on benchmark interest rates and withdrawal of funds, said Zhang Yi, a vice president and senior analyst with Moody’s Investors Service.

Yet, “we’ll be surprised if the overall NPL ratio of Chinese banks exceeds 3 percent by the end of this year,” Zhang said.

Moody’s maintains stable outlook on the Chinese banking industry for the next 12-18 months. However, the agency may change the outlook if the slowdown in economic growth and decline in bank loan quality strain the banks’ financial strength more than what it has assumed, she said.

By Wang Xinyuan