Moody’s Maintains Negative Outlook for Chinese Banks Due to Post-Covid Challenges

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Ratings agency Moody’s has maintained a negative outlook for the Chinese banking sector on the grounds of the challenges created by its recovery from the economic impacts of the Covid pandemic.

“The challenging adjustment to the exit from zero-COVID, for both borrowers and lenders, will weigh on banks’ asset quality and profitability over the next 12-18 months,” Moody’s said in a note published on Wednesday.

“Our outlook on the banking sector remains negative,” said Vice President Nicholas Zhu and Associate Managing Director Chen Huang, the authors of the report that focused on Q4 data for Chinese banking operations.

In November, Moody’s had adjusted its outlook for the Chinese banking sector to “negative” from “stable,” citing concerns about the sector’s “deteriorating operating environment, asset quality and profitability.”

In its latest report, Moody’s pointed to the impact of the pandemic on the non-performing loan (NPL) ratios of Chinese lenders.

“New NPL formation will likely remain high amid the challenging adjustment to the exit from zero-COVID,” the report said.

“We expect banks to steadily dispose of bad debt over the next 12-18 months to keep the NPL ratio stable at the current level of 1.63%.”

The report said that loan growth by Chinese banks will still further accelerate due to a push from policymakers to prop up the health of the economy.

“We expect loan growth to pick up over the next 12-18 months in response to authorities calling for increased financing as the economy reopens.”

Chinese banks’ assets grew by 10.8% last year, as compared to growth of 8.6% in 2021, the report said.

The report sees the capitalisation of Chinese banks holding steady, and the People’s Bank of China (PBOC) continuing to supply the sector with sufficient liquidity.