China’s Mid-sized Regional Banks at Risk of Failure Following COVID-19: S&P Global

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A new report from S&P Global points to heightened risk of bank failure amongst China’s smaller lenders and those with lower capitalisation levels in the wake of the economic impacts of the coronavirus outbreak.

According to the report mid-sized and regional banks in China posted faster increases in borrowers defaulting on loans in the first quarter, amidst a 6.8% contraction in Chinese GDP.

While the average NPL ratio for all Chinese commercial banks rose from 1.91% by the end of March as compared to 1.80% a year previously, smaller banks saw much greater gains.

Municipal commercial banks saw the fastest rise in non-performing loans (NPL), with a rise to 2.45% by the end of March as compared to 1.88% a year previously.

Privately owned banks saw their aggregate NPL ratio rise from 0.68% to 1.14%, while rural commercial banks saw a an increase from 4.05% to 4.09%.

As of the end of March these three categories of banks held 1.141 trillion yuan in NPL’s, as compared to 880.30 billion yuan just a year ago.

These NPL’s accounted for 43.7% of all that bad debt in China’s banking system at the end of March, as compared to a 40.8% share a year ago.

China’s banking sector was already roiled in 2019 by the failure of a string of regional lenders. In the case of Inner Mongolia’s Baoshang Bank this resulted in China’s first government takeover of a depository financial institution in May.

“It’s likely to see failures and takeovers of some weaker regional banks like what we did in 2019,” said Iris Tan, senior equity analyst at Morningstar. 

According to Tan special-mention loans, overdue loans and capital adequacy ratios would serve as other key indicators for potential failure alongside NPL ratios.

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