RETAIL BANKING | Staff Reporter, China

China banks' asset growth dips to 7% amidst tighter regulations

The slowdown is a welcome development as risks particularly in shadow banking are reduced.

As Chinese regulators move to restrain the further expansion of the shadow banking system, assets of commercial banks in the Mainland are poised to take a direct hit with analysts projecting slower asset growth of 7% in 2018 from 8.4% the previous year, according to BMI Research.

Medium and small-sized banks are projected to be the main driver of cooling asset growth extending the trend from 2016 as the asset growth of joint-stock commercial banks fell behind large-size, state-owned commercial banks at 3.4% YoY versus 7.2% in December 2017. 

Asset growth of city commercial banks was also slashed by half with headline growth figures coming in at 12.3% YoY in December 2017 as opposed to the year before. 

“We expect the regulators to continue to restrain the availability of cheaper funding to smaller banks, which will reduce their ability to undertake risky investments that are considered as shadow loans. For example, wealth management products, which are often used as a source of cheaper funding for joint-stock banks, have seen their growth cool aggressively over the course of 2017,” the report added. 

The balance of WMPs significantly slowed down after growing by a measly 1.7% YoY in 2017 from the 23.6% YoY growth rate recorded in 2016 and its share in the GDP also falling from 39.5% in September 2016 to 35.7% in December 2017. 

However, tighter regulations may not spell the doom for China’s commercial banks as banks record higher capital ratios and improving asset quality. 

Here’s more from BMI Research: 

In our view, we believe that cooling asset expansion is positive for the banking sector as it will help to reduce systemic risks in the financial system, and we are seeing signs that fundamentals are gradually improving. Capital adequacy of the banking system is strengthening, with the overall capital ratio rising slightly to 13.7% in December 2017 from 13.3% in 2016. This has been due to broad-based improvements across the banking sector, even though large- sized commercial banks saw the largest improvement to 14.7% from 14.2% over the same period (versus 12.3% from 11.6% for JSBs, and 12.8% from 12.4% for city level banks). The improvement in capital ratios suggest increased ability of Chinese banks to withstand shocks in the system.

Additionally, asset quality in the banking system has been improving since Q316 amid a rise in corporate profitability and economic activity, with the ratio of non-performing loans (NPLs) and special mentions loans as a share of overall loans falling slightly to 5.2% in December 2017 from a high of 5.9% in September 2016. While we expect China’s real GDP growth to slow to 6.5% in 2018 from 6.9% in 2017, Chinese regulators have been improving the country’s macro-prudential framework through the establishment of the Financial Stability and Development Committee and by implementing programmes such as debt-to-equity swap in order to transfer risks. We therefore expect banks to be able to manage their NPLs well over the coming quarters.

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