Chinese banks still see long-term stability ahead

The sector is cushioned enough to absorb eroding asset quality.

China’s banking sector is expected to remain stable for the long term, even as some banks might report losses, according to an S&P Global Ratings report. This is because the industry still has adequate buffers to withstand decaying asset quality brought by the pandemic.

Also read: COVID disruptions intensify risks for Chinese banks

The average provision coverage for reported non-performing loans (NPLs) is likely to drop to about 190% this year from 200%. Reported NPLs should only marginally rise, the report said, despite widespread loan forbearance, with most of these obligations likely to be classified as special-mention loans or marked as normal loans.

Further, credit costs are projected to rise, which could slash profits to very low levels. Some banks could post losses if pressures are fully evident in profits this year, S&P wrote. However, banks with high regulatory provision buffers could opt to release them to absorb the impact, with another option to gradually recognise the decay.

S&P also expects some relaxation in recognition standards as well as in financial buffer requirements to maintain stability whilst the economy recovers.

“The risks for credit costs remain on the downside because forward-looking credit loss provisioning required by International Financial Reporting Standards could add to already strained profitability. A slower than expected economic rebound would play to this more pessimistic tune,” S&P warned.

The severity of the impact will vary depending on the lender’s credit exposure to highly affected sectors and regions, as well as the size of its loan buffers. Loan growth is estimated to be 12% this year on top of supportive policies for select sectors and lax monetary settings, the report said.

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