Central Banks

Fitch caution on Chinese banks ahead of reporting season

PUBLISHED : Wednesday, 23 March, 2016, 2:38pm
UPDATED : Wednesday, 23 March, 2016, 2:38pm

As China’s 16 listed state-owned and joint-stock banks get ready to report their 2015 earnings from next week, Fitch Ratings on Wednesday said it estimates net profit for the sector had likely grown by 2.4 per cent last year while net interest margins slipped 12 basis points to 2.53 per cent.

The global ratings agency said the central bank’s rate cuts eroded the margins of Chinese banks. It also estimates non-performing loans will continue to worsen well into this year, weighing on the asset quality of the lenders.

Fitch noted most banks are struggling to meet the high bar set by the banking regulator to put aside at least 150 per cent of their capital to cover for bad debt. It feels most banks will struggle with their bottom lines unless it is dropped to between 130 and 140 per cent

Last year, the level of provision at most banks fell between 172 and 181 per cent while the banks aggressively raised capital to shore up their balance sheets. Still, the provisions at Chinese banks are among the highest in the world, locking up capital that could be used to generate new businesses.

Given the capital crunch facing Chinese banks, Fitch says, non-capital-reliant activities, such as card businesses, underwriting activities and wealth management product sales, will be the key areas to improve even though excessive reliance on these can lead to increased credit and liquidity risks.

Fitch’s note of caution on the health of Chinese banks follows that of the China Banking Regulatory Commission and ratings agency Moody’s.