COVID disruptions intensify risks for Chinese banks

Regional banks are more vulnerable due to weak capitalisation.

Disruptions brought about by COVID-19 could worsen the latent risk in China’s banking sector, resulting in decays in asset quality, capitalisation and profitability, according to a Moody’s sector report.

The industry will likely see stronger government support, but with credit quality becoming gradually divided between larger banks and smaller lenders, regional banks are standing on unstable ground given their weak diversification and funding.

Significant economic and market dislocations are straining bank operations, and the global spread of the coronavirus has added more pressure on the Chinese economy, opening up the risk that authorities will try to stimulate the economy by accelerating credit growth, the report said.

Primary credit impact will be evident on heightened loan delinquencies amongst wholesale and retail, leisure travel and other consumer discretionary services, with related asset pressure remaining high even after the outbreak subsides due to feeble consumer sentiment. Rising asset risks will result in higher risk-weighted assets and lower capital ratios.

State-owned banks’ strong capitalisation will guard against a potential rise in loan delinquencies, but regional banks have weaker capitalisation because of aggressive asset growth, Moody’s noted. The latter also has higher exposure to affected industries with borrowers, including MSMEs.

Credit deterioration will intensify for a much broader range of lower-rated banks in the event of a more prolonged economic slowdown caused by the pandemic, the report concluded.