China’s SOE banks to manage tariff risks and weakening trade

Manufacturing is a problem, but capital raising should help keep dividend payout ratios.

China’s largest state-owned enterprise (SOE) banks should be able to manage the potential risks arising from the US import tariffs, according to UOB Kay Hian.

On 9 April, US President Donald Trump raised the tariffs on Chinese goods to 125% in response to China’s 84% retaliatory tariffs in an escalating trade war.

Banks are expected to face rising asset quality pressure from the manufacturing sector. Banks that have a higher-than-average exposure to the sector— Bank of China (BOC) and Bank of Communication (BoCom) are said to be more susceptible to risks posed by the trade tensions.

“Amongst the SOE banks, BoC and BoCom are most sensitive to the new manufacturing NPL. That said, the actual impact could be milder if banks tap into their existing provision buffers to cushion earnings,” said UOBKH analyst Kenny Lim Yong Hui.

Hui estimates that the two banks’ provision coverage ratios would drop by an average of 10 percentage points (ppt) to absorb the spike in manufacturing NPLs, if the banks choose to keep credit costs unchanged.

However, although asset quality risks are rising, loans to US-focused exporters make up less than 10% of banks’ total manufacturing loan portfolios, Hui said.

Sluggish trade activities could also hit the banks’ fee income growth, particularly in the settlement and clearing fees.

“This impact is likely to be more significant for SOE banks, as these fees contributed a larger share of their overall gross fee income mix as of 2024. For instance, 31% of China Construction Bank (CCB)’s fee income came from settlement and clearing fees in 2024,” Hui said.

Whilst the reciprocal tariffs clouded China’s economic outlook, China is expected to step up with more aggressive stimuli to counter the tariffs.

“We see growing opportunities in Chinese banks given the rebound in the dividend yields following the recent market correction, as investors may rotate back into defensive, high dividend yield names amid the sentiment hit from tariff shocks,” Hui said.

To keep dividends flat, SOE banks would need to raise their dividend payout ratios by an average of 4.1 ppt from the current level to 30%.

The four major SOE banks— BOC, BoCom, CCB, and the Postal Savings Bank of China (PSBC)— should be able support around RNB4.2t of risk weighted assets (RWA) expansion using the capital to be raised through private placement of A-shares, announced in March 2025.