China regional banks split on loan quality as property exits accelerate

One third of regional banks have creditworthiness in line with sector averages.

Local economies of Chinese regions are increasingly becoming the deciding factor on a regional bank’s business health, according to an analysis by S&P Global Ratings.

In a sample of 57 top commercial banks and rural commercial banks across China, S&P said that outside of the large megabanks and joint stock banks, at least one-third of regional banks maintain a creditworthiness in line with sector averages, and some even exceed national benchmarks in multiple metrics.

A common thread is that top-performing regional banks are located in “resilient economic regions.”

“Top regional banks are demonstrating increasing stability, in our assessment. Driven by evolving local government mandates in recent years, these banks are gradually transitioning their lending focus away from high-risk areas,” S&P said.

Examples of these top-performing regional banks include the Bank of Ningbo, Shanghai Rural Commercial Bank, and the Bank of Chongqing.

Furthermore, regional banks are reducing their exposure to the real estate sector, S&P said.

Instead of high-risk assets, banks are focusing on Beijing’s so-called ‘five-priority loans’, the company added—loans for high-growth stable sectors such as advanced manufacturing, technology, and green finance.

A stronger economy also supports higher loan growth. Banks from provinces and municipalities under the Region 1 category of S&P reported an average annual loan growth rate of 9.7%, outpacing the 6.9% average for Region 2 banks.

Region 1 banks hail from Beijing, Shanghai, Chongqing, and the provinces of Anhui, Fujian, Guangdong, Hubei, Hunan, Jiangsu, Shandong, Sichuan, and Zhejiang, cities and regions that S&P said are “economically stronger” than the banks in Region 2.

“We believe the risk of the relatively higher loan growth in region 1 to remain manageable as the proportion of higher risk lending is diminishing along with the sector trend,” S&P said.

S&P said that a more favorable local economy in these regions support higher corporate earnings and household incomes, leading to the banks' superior credit quality and better profitability.