Credit risk

Chinese banks face slower loan growth, squeezed margins and credit risk in 2022


Slowing loan growth, squeezing margins and increasing credit risk will weigh on Chinese banks as we enter 2022.

Beijing’s latest attempts to free up more liquidity for loans are too small to revive credit growth, which has slowed to its lowest pace in more than 15 years, analysts said. The easing measures, which include lowering bank reserve requirement report and a 5 basis point cut for a benchmark interest rate at the end of last year is likely to keep banks’ net interest margins at multi-year low levels.

At the same time, slower economic growth, lingering debt problems for real estate developers, and the end of loan repayment extensions for small businesses are expected to increase credit risk for lenders, especially those less capitalized with portfolios of more concentrated loans, analysts added.

“We expect China to use more easing measures – such as proactive fiscal policy, prudent monetary policy as well as targeted industrial policies – to prevent a downward spiral and reverse a sharp slowdown in growth.” China Renaissance Securities said in a Jan.3 statement. report.

Banks in China are facing increasing pressure on their profitability amid market challenges and policies on multiple fronts. The collapse of the residential real estate market, COVID-19 restrictions and lingering tensions between Beijing and Washington have slowed factory activity, business investment and household consumption in China. Regulatory crackdowns in the financial, tech and real estate sectors have also hampered business expansion and fundraising activities, which are key sources of revenue for banks.

Investments in property, plant and equipment in the first 11 months of 2021 increased 5.2% from the previous year, according to the National Bureau of Statistics of China. The measure, which indicates business loan demand, was down sharply from 35.0% year-over-year growth in the January-February period of the same year. Meanwhile, China’s year-over-year GDP growth slowed to 4.9% in the September 2021 quarter, from 7.9% in the previous three months.

Slower loan growth

Lending growth in China is faltering. Chinese financial institutions’ outstanding loans increased 11.37 percent in November 2021 from a year earlier, according to the China Banking and Insurance Regulatory Commission, or CBIRC. The growth rate was the lowest since March 2006.

“We will see [fewer] residential mortgage loans, taking into account the general control policy [for the] the real estate market is based on houses [being] to live not on speculation, ”said Yongmei Cai, a partner of Simmons & Simmons, a law firm. It is also much more difficult for investors to obtain loans to invest in properties, Cai said.

The outstanding mortgage balance increased 11.3% in the third quarter from a year earlier, also slowing from the 13.0% growth in the second quarter, according to the CBIRC.

Outstanding loans for real estate development remained stable at the end of the third quarter compared to the previous year, much slower than the 2.82% year-on-year growth at the end of the second quarter, according to the CBIRC .

“The government’s underlying policy of limiting leverage in the sector would persist,” said Cheng Wee Tan, senior equity analyst at Morningstar.

Persistent pressure on margins

The central bank reduced the reserve requirement ratio, or the portion of liabilities – mainly deposits – that banks must hold with themselves by 50 basis points, in order to free up capital for loans on December 6, 2021. More later in the month, it reduced the one-year loan prime rate, or LPR, to 3.80% from 3.85%. The reduction, the first in 20 months, was part of efforts to revive demand for loans. Another benchmark, the five-year prime rate, which is often used to price mortgages, remained unchanged at 4.65%.

“[The] a moderate reduction has sent a signal to ease Beijing’s bias, but its actual impact will be quite limited, ”Nomura said in a Dec. 20 note.

Since China’s one-year deposit rate has remained at 1.5% since late 2015, Nomura said in the report that further LPR cuts would further reduce banks’ NIMs and increase pressure on their profitability. China Renaissance predicts that the central bank will reduce the one-year LPR by an additional 10 basis points and the reserve requirement ratio by 100 basis points this year.

The average NIM of all Chinese banks has hovered between 2.06% and 2.07% since the start of 2021, down from its recent high of 2.20% in the fourth quarter of 2019, according to CBIRC data.

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Return on capital, another indicator of profitability that shows how effective a bank is at turning capital into profits, has fallen for two consecutive quarters. China’s banking sector generated a return on capital of 10.10% in the third quarter of 2021, compared to 10.39% and 11.28% in the second and first quarters of the year respectively, according to data from the CBIRC.

Bubbling credit risk

The overall ratio of non-performing loans in the Chinese banking sector has declined due to the acceleration of loan cancellations. However, the real estate sector’s NPL ratio jumped to 2% in the first half of 2021 from 1.2% in 2019, indicating a deterioration in the quality of the segment’s assets, according to Gary Ng, senior economist at investment bank Natixis. .

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“More risk can be seen in smaller banks with high exposure to real estate developers and linked to local governments,” Ng said, adding that banks with high exposure to real estate developers could face larger loan cancellations and growth. lower income in the future.

As many banks refrain from lending to highly leveraged developers and build more loan loss provisions, authorities are pushing lenders to provide more loans to vulnerable small businesses at affordable rates, which increases the risk to the quality of their assets and their income.

Small business credit risk is likely to increase after the government-mandated loan repayment extension for these borrowers ends at the end of 2021, analysts added.

“Ready [to small businesses] presents challenges in controlling risks, it may not be easy to generate substantial loan growth, ”said Cai de Simmons.