High loan growth still weighs on China regional banks: report

China’s regional banks are still faced with great credit challenges as their capitalization and liquidity remains under pressure from high loan growth, despite slowing asset growth, improving problem loan recognition and efficiencies, Moody’s Investors Service said in a recent report.

Based on data from 133 regional lenders that have listed or issued financial bonds in the market and have publicly available financial reports, the rating agency found that regional lenders’ capitalization is pressured by fast loan growth, although their capital adequacy ratios rose in 2017.

The capital adequacy ratio is a measure of a bank's capital, aimed to make sure that lenders have enough of a buffer to absorb a reasonable amount of losses before they become insolvent.

Besides, these smaller players in the banking industry saw their profitability still lagged behind the whole industry on account of fierce deposit competition and higher credit cost, the report said.

Data shows that listed regional banks’ net interest margins — a key indicator of commercial lenders’ profitability — narrowed further in the first half of 2018, compared with an improvement in the sector’s average level, which suggests that they remain subject to higher funding costs.

Moody’s said that liquidity pressure continues for these small competitors as their loan to deposit ratios rose faster than the industry during the first six months of 2018. The rating agency believes that such pressure will ease with more welcome monetary policies from regulators on the way.

Meanwhile, regional banks have seen more pronounced deceleration in their asset growth than the overall sector due to tightened regulations on shadow banking and inter-bank activities.

Also, listed regional banks quickened their bad loan recognition from January to June, with their asset quality being stabilized and bad loan recognition improved.

China’s regional banking institutions, including city and rural ones, accounted for around one quarter of the country’s banking system assets at the end of 2017. The country boasted 134 commercial city banks, 1,114 commercial rural banks, 40 rural cooperative banks and 1,125 rural credit cooperatives at the end of 2016.