Chinese banks' bad loans increased for a third straight quarter, the longest streak of deterioration in eight years, highlighting pressures on asset quality and profit growth as the economy weakens.

Non-performing loans rose by 18.2 billion yuan ($2.86 billion) in the three months ended June 30 to 456.4 billion yuan, the China Banking Regulatory Commission said in a statement on its website today. Bad loans surged at all types of banking institutions, including the largest state-owned lenders, rural banks and foreign banks, the regulator said.

Chinese lenders are grappling with rising defaults, weaker loan demand and lower lending profitability after economic growth decelerated for a sixth quarter and the central bank cut interest rates twice this year. Combined net income growth at the nation's 3,800 lenders slowed to 23 percent in the second quarter from 24 percent in the previous three months, the regulator said today.

“There's no doubt that banks' asset quality is worsening along with the economy,” said Xie Jiyong, a Shanghai-based analyst at Capital Securities Corp. “The question is when will this peak. We haven't seen signs of stabilizing yet.”

Chinese banking shares dropped. Shanghai Pudong Development Bank Co. fell 3 percent to 7.57 yuan at the close of trading in its home city, the biggest decline in a month, after saying yesterday its bad loans surged by more than 30 percent in the first half. Industrial & Commercial Bank of China Ltd., the nation's largest lender, lost 1.8 percent at 3:06 p.m. in Hong Kong.

Non-performing loans, or those overdue for at least three months, accounted for 0.9 percent of banks' total advances as of June 30, unchanged from March, according to the regulator.

Most of the increase in bad loans came from the eastern Chinese province of Zhejiang, where soured debt rose by 26.8 billion yuan in the first half this year to 75.9 billion yuan by June, the Shanghai Securities News reported today, citing an unidentified banker.

New local-currency loans of 540.1 billion yuan in July missed analysts' estimates, declining 41 percent from June. Industrial-output growth of 9.2 percent was the weakest in three years. Producer prices declined 2.9 percent, pointing to further pressure on companies' profits and ability to repay debt.

Korean Households

Slowing economic growth is eroding credit quality among South Koreans also. Lenders' ratio of soured household debt to total lending in the category rose to 0.76 percent in June, almost a six-year high, Korea's Financial Supervisory Service said today. New bad loans may rise in the second half if the economy deteriorates due to Europe's debt crisis or slowing growth in China, the FSS said in an e-mailed statement.

Kim Seok Dong, South Korea's Financial Services Commission chairman, told lawmakers last month that while the country's household debt is manageable, a slowdown in China is a potential threat to the economy.

Barclays Plc, Deutsche Bank AG and Bank of America Corp. this month cut their third-quarter growth forecasts for China, while Morgan Stanley lowered its outlook for the full year to an 8 percent expansion, down from 8.5 percent.

Chinese banks' net interest margin, a measure of lending profitability, narrowed to 2.7 percent in the second quarter from 2.8 percent in the first, according to today's statement. Their capital adequacy ratio rose to 12.9 percent as of June 30, from 12.7 percent in March.

Instant Insights /

Chinese Bad Loans Rise

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