Chinese banks face concentration risk from top borrowers

The stress test found banks from poorer regions as most vulnerable.

Chinese banks’ top risks are when its customers are too big to fail, warned S&P Global Ratings, based on a stress test conducted by the central bank.

The People’s Bank of China (PBOC) tested a scenario where the top five borrowers of each surveyed lender defaulted, involving 3,235 lenders or 86% of system loans. PBOC found that banks’ capital adequacy ratios would drop 3.8% percentage points (ppt) during this scenario.

S&P, replicating this survey with 450 banks or 78% of system loans, assumes systemic shock to China’s growth in such a scenario.

"Our finding in broad strokes is that banks in China's poorer regions are more exposed to concentration risk, and that the cash-strapped governments in these regions would find a bailout more challenging," said Ming Tan, S&P Global Ratings credit analyst.

Customer concentration risk in China is lower than in South and Southeast Asia, S&P said.

On the other hand, Chinese banks breaching regulatory safeguards are not large enough to shake the system at the national level.

“Offenders tend to come from lower-income areas, with about two-thirds in regions where GDP per capita is below the national median level,” S&P said.