COVID-19 disruptions worsens risks for banks in China
Disruptions caused by COVID-19 could make China’s banking sector’s latent risk worse, leading to declines in asset quality, capitalisation, and profitability, according to a Moody’s sector study.
The industry is likely to see stronger support from the government, but with credit quality slowly dividing between larger banks and smaller lenders, regional banks are on shaky ground due to their weak diversification and funding.
Significant economic and market dislocations are straining bank operations, and the global spread of coronavirus has put more pressure on the Chinese economy, opening up the possibility that by increasing credit growth, authorities will stimulate the economy, the report said.
The primary impact on credit will be evident on increased loan delinquencies between wholesale and retail, leisure travel and other consumer discretionary services, with associated asset pressure remaining high even after the outbreak subsidies due to reduced consumer sentiment.
Higher risk-weighted assets and lower capital ratios will result in rising asset risks. The strong capitalisation of state-owned banks will protect against a possible increase in loan delinquencies, but regional banks have weaker capitalisation due to rapid asset growth, Moody’s noted.
The latter also has an increased exposure with borrowers to affected industries, including MSMEs. In case of a more severe economic recession triggered by the pandemic, credit degradation will escalate for a much broader set of lower-rated banks, the report concluded.