The State of Chinese Banks in the Wake of the Covid Pandemic

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Chinese banks have managed to successfully weather the worst the Covid-pandemic, with non-performing loan levels holding steady and only a modest decline in capital adequacy ratios.

According to a report released by Zeng Gang (曾刚), chair of the Shanghai Institution of Finance & Development (SIFD), Chinese banks posted a solid performance in 2022, the final year of widespread Covid lockdowns in China.

“In 2022, the total assets of commercial banks continued to grow rapidly, while the growth rate of net profits showed a considerable level of decline, although overall risk resistance capability remained comparatively robust,” Zeng wrote.

As of the end of December 2022, the total domestic and foreign currency assets of China’s banking sector financial institutions were 37.94 trillion yuan, for a year-on-year (YoY) increase of 10.0%.

As of the end of December 2022, the cumulative net profits of Chinesecommercial banks was 2.303 trillion yuan, for a YoY increase of 5.4%, albeit a decline in growth rates compared to the previous year.

Profit levels varied widely across Chinese banks in 2022. The net profits of rural commercial banks decreased by 2.3% last year, significantly dragging down the overall profit growth rate for Chinese banks overall.

A narrowing of net interest margins also may hav also contributed to easing profit growth. The overall net interest margin of Chinese commercial banks stood at 1.91% as of the end of 2022, for a decrease of 17 basis points compared with the same period the previous year.

Zeng points out that the overall health of bank balance sheets in China has held up reasonably well following the adverse impacts of Covid-related restrictions.

The total volume of non-performing loans (NPLs) of Chinese commercial banks was 2.98 trillion yuan as of the end of 2022, for a YoY growth rate of 4.8%, and a level that Zeng Gang considers to be comparatively modest.

The overall NPL ratio for Chinese banks was 1.63%, for a YoY decline of of 10 basis points, and nine consecutive quarters of decrease.

The provisions coverage ratio was 205.8%, for an increase of 8.9 percentage points compared to the same period last year, indicating that the risk resistance ability of Chinese banks has continued to strengthen.

The average core Tier 1 capital adequacy ratio, Tier 1 capital adequacy ratio, and capital adequacy ratio of Chinese banks stood at 10.74%, 12.25%, and 15% respectively as of the end of 2022, with the overall capital adequacy ratio edging lower 13 basis points compared to the same period the year previously.

The overall liquidity coverage ratio of commercial banks was 147.4%, for an increase of 2 percentage points compared to the same period the preceding year, while the liquidity ratio was 62.85%, for a YoY increase of 3 basis points, preserving overall stability.

Looking ahead to 2023, Zeng said that Chinese banks will actively promote the implementation of Basel III with reference to China’s own draft version of the “Capital Management Measures for Commercial Banks” (商业银行资本管理办法(征求意见稿)).

Zeng said that Chinese banks should continue to support the real economy and strengthen their ability to resolve and prevent major risks. They can be expected to further strengthen data governance, in order to effectively satisfy the latest data management requirements for regulatory statistical management in the banking sector.