Moody’s Expects Asset Quality of Chinese Banks to Be Hit by COVID-19 Before End of 2020

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Rating’s agency Moody’s expects the impact of the COVID-19 pandemic on the asset quality of banks to make themselves apparent in six months time.

An online meeting held by Moody’s in conjunction with China Cheng Xin International Credit (CCXI) said that overall profits in the Chinese banking sector were weakening as a result of an economic downturn and narrowing interest rate spreads.

Moody’s analyst Li Yan (李燕) said she expects asset quality risk in the banking sector to be reflected in the second half of 2020 as well as the first half of next year, alongside an increasingly varied performance amongst Chinese lenders.

Since the start of the COVID-19 pandemic in January 2020 China’s banking sector has yet to see sizeable rise in non-performing loans (NPL).

Data from the Chinese central bank indicates that as of the end of June the NPL balance of the Chinese banking sector was 3.6 trillion yuan, for an NPL ratio of 2.1%, and a rise of 0.8 percentage points compared to the start of the year.

The provision coverage ratio was 178.1% as of the end of June, for a decline of 4 percentage points.

Li Yan said that the reason for the muted rise in NPL’s is that they only tend to come to light following a six to nine month delay, while the big Chinese banks are still capable of using existing provisions to absorb NPL’s.

Reg­u­la­tors have been highly con­cerned about the un­cer­tain health of Chi­na’s re­gional banks since May 2019, when the prob­lems of In­ner Mon­go­li­a’s Baoshang Bank prompted Bei­jing to launch a forcible takeover. 

A re­port from S&P Global in­di­cates that in the first quar­ter 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.

At least 16 regional banks in China have posted negative growth in net profits for the first half of 2020.

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16 Re­gional Banks in China Post Neg­a­tive Net Profit Growth in First Half of 2020

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

Think Tank Frets over Im­pact of Coro­n­avirus on Chi­na’s Small Busi­nesses and Re­gional Banks

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