Chinese banks face headwinds in Q1, but asset growth rebounds

Asset quality tightened but is yet to reflect the effects of the pandemic.

The coronavirus pandemic resulted in downfalls for the Chinese banking sector during its peak in Q1 2020, regulator statistics revealed, but bank asset growth recovered in line with policy focus, according to a Moody’s analysis.

Asset quality shrank but is yet to show the full impact of the pandemic, the report said. Non-performing loans (NPLs) increased to 1.91% at end-March from 1.68% at end-2019, with regional banks displaying more pronounced rise in delinquency than their nationally-franchised peers. Pressure is expected to remain elevated as businesses are still vulnerable to customer sentiment.

Capitalisation has weakened on faster growth of risk-weighted assets, as reflected in a fall of Core Tier 1 capital ratio by four basis points in Q1, but additional Tier 1 capital as a ratio of risk-weighted assets rose three basis points due to issuance of perpetual bonds.

Profitability also fell with annualised return on assets averaging 0.98% in Q1, four basis points lower than a year ago, analysts said. This was spurred by the seven-point shrink in net interest margins. Despite government stimuli, credit costs are likely to remain high, they added.

On the other hand, asset growth rebounded to 10.7% at end-March due to a pickup in non-loan assets. The supply of non-loan credit should increase for the rest of the year because of slower implementation of asset management regulations, Moody’s wrote.

Commercial banks' average loan/deposit ratio fell to 74.9% at end-March from a multiyear high of 75.4% a quarter ago. The PBOC has maintained adequate system liquidity by easing monetary policies to offset disruptions caused by the coronavirus outbreak, the report concluded.

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