Large, mid-sized Chinese banks’ capital pressures easing: Fitch

Stress test shows NPL ratio likely to rise, but not to levels PBOC expects, the ratings agency said.

Capital pressure on large and medium-sized Chinese banks are easing, according to the latest stress-tests done by the People’s Bank of China (PBoC) released in September.

Only three out of the 30 banks tested would fail to meet minimum regulatory capital requirements in 2021 under a severe economic slowdown, according to PBOC’s 2021 Financial Stability Report. This is a big improvement from last year’s 21 lenders failing.

The improved results reflect the economic recovery and the resolution of non-performing loans, as well as capital replenishment, says Fitch Ratings in a report. 

“We believe that state banks and large joint-stock commercial banks would continue to maintain capital well above the minimum requirements despite a probable economic slowdown from 2022,” the ratings agency said.

Expect non-performing loans (NPL) to still rise for the 30 banks measured in the stress test. PBOC’s mild stress situation—which forecasts a slower 2021 GDP growth compared to Fitch (7.3% for PBOC compared to 8.4% for Fitch)—expects that the NPL ratio of the 30 lenders will rise to 2.4% in 2021 from 1.8% by the end of the first half of 2021.

For their part, Fitch does not expect the NPL ratio to rise to the level PBOC stated, noting that ongoing resolution of NPLs should prevent sharp deterioration. 

PBOC expects the ratio to further increase in 2022, particularly when taking into account small banks.

“Unlike large and medium-sized banks, small banks still face significant capital pressure from the economic slowdown and asset-quality risks,” Fitch said. “Small banks typically have higher risk appetites and weaker capital buffers as they have higher funding costs and weaker customer franchises.”

The PBoC’s sensitivity analysis shows that small banks’ capital ratios are typically much more sensitive to an increase in NPLs than those of larger banks, which supports Fitch’s view that they benefit less from the broad operating environment improvement, the report added.