China’s banks face challenging year, but crisis unlikely

Cessation of lending by government-controlled banks seen as unlikely

PUBLISHED : Wednesday, 27 January, 2016, 9:07am
UPDATED : Wednesday, 27 January, 2016, 11:11am

China’s banking sector faces a challenging 2016, with risks coming from rising non-performing loans and potential volatility in interest rates and stock markets, according to analysts.

However, they say, a banking crisis is still unlikely because the banks are primarily deposit funded and government-controlled lenders tend to continue extending loans to companies despite their high financial leverage.

“The days of rapid expansion and profit growth for China’s banks are over,” PricewaterhouseCoopers (PwC) and the China Banking Association said in a recent report based on a jointly conducted survey of more than 1,300 Chinese bankers.

As the mainland Chinese economy suffers from slowing growth and a structural imbalance, non-performing loans have increased, making it more challenging for lenders to manage credit risks, Richard Zhu and Raymond Yung, financial service executives for PwC China, said in the report.

About 80 per cent of the respondents saw “credit risk management” as one of the biggest pressures facing the industry.

It has also “grown in importance with the financial market volatility”, the report added.

We also anticipate further increases in loan delinquencies, more defaults on corporate debt and some losses in wealth-management products
Christine Kuo, Moody’s

Besides, since interest rate liberalisation has lowered the entry threshold for the sector, bankers in the survey agreed there was an urgent need for existing players to transform themselves and tackle a range of issues, including accelerating adjustments to their asset-liability structures, improving pricing and addressing the composition of their client base.

Moody’s Investors Service also predicts Chinese banks could face heightened uncertainty and risks in the next few years amid increased volatility in interest rates, stock prices and fund flows.

The negative trends in China’s banking system have intensified in the past year, with lenders’ asset quality and profitability metrics worsening, possibly due to the economic slowdown, interest rate liberalisation, and the potential side effects of the 2009-2010 credit boom, analysts from the rating agency said on Tuesday.

Recent signs of “increased financial market and fund flow volatility” might pose additional risks to the system.

Moody’s analysts said they expected Chinese banks could have “frequent episodes of tight funding conditions” due to capital flows and their growing portfolio of illiquid investments.

“We also anticipate further increases in loan delinquencies, more defaults on corporate debt and some losses in wealth-management products, as more borrowers struggle to meet payments against the backdrop of high financial leverage and a downturn in their respective sectors,” Moody’s senior vice-president Christine Kuo said.

However, despite heightened volatility in financial prices and fund flows for the industry, Moody’s said it was unlikely China would experience a banking crisis this year.

The possibility of Chinese lenders experiencing “a depletion in liquidity” or “a cessation in lending activities”, which characterise a banking crisis, was low, the analysts said.

On one hand, Chinese banks are primarily deposit funded, and the risk of a system-wide deposit run is limited by the government ownership in most banks. In addition, the mainland’s large number of domestic savers do not have sufficient investment alternatives.

On the other hand, the rating agency said it expected the banking sector to continue to extend loans to companies, despite their high leverage, particularly as the industry is dominated by government-controlled banks.