Smaller banks may struggle to weather China’s slowing economy, S&P warns
- Some lower-tier city, rural commercial banks may be forced to merge or exit the market, S&P says
- Regulators are likely to arrange ‘orderly’ exits, rather than let a small bank fail, the rating agency says
Tightening financial regulations and a slowing economy as a trade war continues to rage with the United States may force some of China’s smaller banks, including lower-tier city and rural commercial lenders, to merge with larger players or exit the market, S&P Global Ratings said.
In a research note on Tuesday, the credit ratings agency warned that some small and mid-sized banks are less equipped to deal with a “slowing and rebalancing economy” and a changing regulatory landscape. Troubled banks make up about 4 per cent of the sector’s total assets in China, S&P said.
“In our view, Chinese authorities are not, at this stage, comfortable with testing the potential reverberations of letting even a small bank abruptly fail,” S&P credit analyst Liang Yu said in the note. “Rather, we expect regulators would arrange an orderly ‘exit’ if needed through a less-jolting medium: such as through restructuring or a merger with a larger institution.”
The potential stress on the lower ends of China’s financial system comes as the mainland economy has been slowing this year as the effects of the trade tensions with the US filter into the economy.
Industrial production – a measure of the output of the industrial sectors in China – only grew by 4.8 per cent in July, down from 6.3 per cent in June and well below economists’ expectations. Retail sales also grew at a slower pace in July.
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The US has placed tariffs on some US$250 billion of Chinese imports and threatened to add further levies on another US$300 billion of goods beginning on September 1. China has responded with its own duties on American goods and agricultural products.
Fitch Ratings said last week that stress from a severe economic downturn in China would pressure the stand-alone credit profiles of mid-tier banks in China and probably require some form of government support to bring those lenders back into compliance with regulatory minimums.
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Banks in trade-dependent developed markets would face the most pressure to their credit profiles in the event of a severe economic slowdown in China because of the trade war, with Hong Kong banks having the most direct exposure, Fitch said in a research report on August 21.
“We would expect further pressure on profitability. Clearly, we would see an increase in non-performing loans among the Chinese banks and a need to raise additional capital,” Jonathan Cornish, head of Asia-Pacific bank ratings at Fitch Ratings, told Bloomberg Television on Tuesday. “It’s not just Chinese banks that would be affected. We would expect there to be negative implications across the region, especially those that are most exposed to China.”
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In its report on Tuesday, S&P said that megabanks and national banks in China would be the most able to weather slower growth and other headwinds in the financial sector, given their funding and capital strength. Megabanks, however, might have to shoulder policy mandates that constrain their profitability, such as providing affordable credit to the higher-risk private sector and small businesses, S&P said.
Some smaller banks in China – lower tier city and rural commercial banks – have had a harder time adjusting to a tightening regulatory environment, including a clampdown on shadow banking, closer surveillance on shareholding structures and tougher rules on non-performing loans, the ratings agency said.
“Some banks at the bottom end of the credit spectrum may need to reach out to the local or central government for support,” S&P said. “We do not expect any banks to abruptly collapse, but we see managed exits from the market.”
