Finance News

China's banks are getting ready for extra non-performing loans because the coronavirus economic system slows down

The skyline of the Lujiazui financial district in Shanghai, China.

Hector Retamal | AFP | Getty Images

Chinese banks have remained relatively unscathed so far when the coronavirus pandemic hit economies around the world – but that could change in the coming months. Rising non-performing loans are expected to depress margins and lower profits, analysts said.

China's financial regulator warned over the weekend that commercial banks could see a huge surge in bad debt as the world's second largest economy slows.

The International Monetary Fund has predicted that China's economic growth will slow in 2020 from 6.1% in the previous year to 1%.

The Chinese banking and insurance regulator said that some banks have not yet created sufficient provisions to cover potential credit losses. If the minimum amount of buffers were set aside, banking profits would decrease more than 350 billion yuan ($ 50.08 billion), the regulator said.

In China, bad or non-performing loans generally refer to loans with overdue repayments of more than 90 days. However, some banks – reportedly requested by the regulator – also consider loans with a shorter overdue term to be bad loans.

Analysts said that bad credit yield losses could occur in the coming months, with smaller banks likely to feel more pressure.

"Due to various COVID-19 aid measures, the Chinese banking sector has not fully addressed the risks to the profitability and quality of assets that could arise in the second half of 2020 and in 2021," analysts from credit research firm CreditSights wrote in a Wednesday report.

Covid-19 is the official name of the coronavirus disease that first appeared in China before it spread worldwide.

"Small and medium-sized financial institutions are still much more vulnerable than large state-owned commercial banks with nationwide franchises, and are likely to bear the brunt of eventual billing," they added.

Smaller banks are more vulnerable

A report released this week by Fitch Bohua, a 100% Chinese-owned domestic bond rating agency owned by Fitch Ratings – predicts that urban commercial banks would see a larger increase in non-performing loans this year than their larger counterparts, which are government lenders and equity banks.

The agency outlined the course of non-performing loans between the various banking categories in three scenarios.

In its worst scenario, in which China's economic growth slows to 1% this year, the bad debt ratio among urban commercial banks would increase by 3.44 percentage points. Fitch Bohua said. This is more than the jump of 2.62 percentage points for stock banks and 1.92 percentage points for government lenders, the report said.

The relative weakness of smaller banks is one reason why the Chinese government has taken measures to help them, CreditSights analysts said. The measures include measures to reduce financing costs and to support the recovery of capital.

In the meantime, larger banks have the resources to withstand a much larger increase in bad debt, the research firm said.

Opportunity for investors

Even if profitability is likely to be impacted in the near future, rising interest rates and a recovery in credit demand are likely to support Chinese bank margins in the future, according to a Morgan Stanley report over the weekend.

This is due to a general improvement in the Chinese economy. In the quarter ending June 30, China saw economic growth of 3.2% year over year, a decrease of 6.8% in the previous quarter.

Morgan Stanley analysts believe the market will look beyond the immediate impact on earnings growth and will instead focus on future earnings prospects.

Chinese bank stocks have suffered this year, with the FTSE China A 600 Banks Index, which lists high and mid-cap banks listed on mainland China stock exchanges, up 10.9% so far this year, according to refinitive data has dropped.

Morgan Stanley said a short-term weakness in the share price would offer investors an entry point into Chinese banks such as China Merchants Bank and Ping An Bank.

Related Articles