Chinese banks have so far emerged relatively unscathed as the coronavirus pandemic hit economies around the world — but that could change in the coming months. Rising bad loans are set to squeeze margins and reduce profits, said analysts.
China’s financial regulator warned over the weekend that commercial banks could experience a big jump in bad loans as the world’s second-largest economy slows down, CNBC writes.
The International Monetary Fund has predicted that China’s economic growth in 2020 will moderate to 1% from last year’s 6.1%.
The China Banking and Insurance Regulatory Commission said some banks have yet to set aside enough provisions to cover for potential loan losses. Putting aside the minimum amount of buffers would set profits in the banking sector back by more than 350 billion yuan ($50.08 billion), said the regulator.
In China, bad or non-performing loans generally refer to those with overdue repayments exceeding 90 days. But some banks — reportedly urged by the regulator — also consider loans with a shorter overdue period as bad loans.
Analysts said the hit to profits as a result of bad loans could emerge in the coming months, with smaller banks expected to feel the pressure more.
“Due to various COVID-19 relief measures, the Chinese banking sector has not fully accounted for the risks to profitability and asset quality which may begin to materialise in the (second half of 2020) and 2021,” analysts from credit research firm CreditSights wrote in a Wednesday report.
Covid-19 is the formal name of the coronavirus disease, which first emerged in China before spreading globally.
“Small and medium-sized financial institutions remain much more vulnerable than large, state-owned commercial banks with nationwide franchises and will likely bear the brunt of the eventual reckoning,” they added.
A report released this week by Fitch Bohua — a Chinese domestic bond ratings agency wholly owned by Fitch Ratings — projected that city commercial banks would experience a larger jump in bad loans this year compared to their larger peers, which are state-owned lenders and joint-stock banks.
The agency outlined the trajectory of bad loans among the different category of banks under three scenarios.
In its worst scenario, where China’s economic growth slows to 1% this year, the ratio of bad loans among city commercial banks would increase by 3.44 percentage points, Fitch Bohua said. That’s more than the jump of 2.62 percentage points in joint-stock banks and 1.92 percentage points among state-owned lenders, according to the report.
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