Moody’s Expects Strong Performance of China’s Top Regional Banks to Stymie Systemic Risk

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A new report from Moody’s Investors Services says the strong performance of China’s leading regional banks will help to contain systemic risk in the Chinese financial system in the wake of the COVID-19 pandemic.

The December report found that top regional banks in China are outperforming their smaller peers in terms of profitability largely due to their advantageous locations.

“China’s top regional banks will benefit from operating in regions that are key GDP contributors to the economy, and a lending focus on stronger regional enterprises and retail borrowers,” says Yulia Wan, a Moody’s Vice President and Analyst. 

“Smaller regional banks are at greater risk of financial stress, given their exposure to riskier regions and loans, but their issues should also be easier to resolve by authorities thus containing contagion risk,” adds Wan.

The report entitled “Top regional banks’ outperformance over smaller peers limits systemic risk” also forecasts that leading regional banks will continue to outperform their smaller peers across a range of metrics, including asset quality, profitability and capitalisation.

Profitability will receive a boost from a rapid shift by top regional banks towards retail loans, as they provide more stable interest rates compared to corporate loans.

The conclusions of the report arrive amidst strong concerns over the health of smaller regional lenders in China, following a string of bank runs and take-overs that first kicked off with the forcible acquisition of Inner Mongolia’s Baoshang Bank by the Chinese government in May 2019.

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