Central bank's push for economic support a blow to Chinese banks

The PBOC has depended on banks for debt reprieve to virus-hit firms.

China’s banking sector is expected to take further hits amidst the COVID-19 outbreak and the central bank’s push to buttress the economy, a UOB Kay Hian report revealed.

According to analysts Eric Wang Zhen, Jayson Kong, Cherrie Tan and Tham Mun Hon, whilst the People’s Bank of China (PBOC) has been mostly focused on expanding the sector’s balance sheet, it has once again relied on banks for debt reprieve to businesses directly affected by the virus.

Thus, earnings outlook and asset quality should worsen in the near to medium term. Small banks will see higher non-performing loans (NPL) due to lower client creditworthiness in proportion to state-owned enterprises (SOEs) and joint-stock banks (JSBs).

“We foresee a need for Chinese banks to raise capital in 2020. Specifically, small banks, especially small unlisted banks, would face greater pressure in capital adequacy,” the analysts wrote.

As shown by their calculations, NPL ratio of listed small banks averaged 1.71% but the sector NPL ratio of city banks and rural commercial banks went up to 2.30% and 3.95% respectively by end-Q3 2019. Whilst default risk amongst unlisted small banks may result into problems for JSBs through the interbank market, they believe such dangers have yet to be fully discounted by the market.

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