China banks' faster growth mitigated by adequate liquidity, capital raising

Chinese commercial banks saw their assets growth accelerated and assets quality stabilized during the first quarter while heeding regulators' call for more lending to the real economy, Moody’s Investors Service said.

Asset growth jumped to 8.7 percent, driven by more lending to privately-owned enterprises including small companies.

Loans grew by 13.8 percent from January to March, outpacing the 3.5 percent growth in non-loan assets.

Asset quality stabilized in the first three months. The system-wide non-performing loan ratio was largely flat, while banks continued to dispose of their bad loans.

The special mention loan ratio — a leading indicator of asset quality — also declined. However, NPL ratios edged up by 9 basis points among smaller city and rural commercial banks.

Lenders’ capitalization balanced between faster asset growth and strong issuance. The core first tier capital adequacy ratio softened by 4 basis points to 10.95 percent, in line with their faster asset growth.

Growth of risk-weighted assets rebounded in the period from deceleration in the previous period. Bank issuance of capital securities, including additional tier 1 securities (preference shares and perpetual bonds) and tier 2 bonds, remained robust.

Moody’s predicted that  profitability of Chinese banks would continue to soften. The system's annualized return on assets averaged 1.02 percent in the first quarter of 2019, 3 basis points lower than a year earlier.

The net interest margin, a key metric for banks’ profitability, fell by one basis point from a quarter earlier despite firmer loan pricing. High credit costs will keep lenders’ profitability subdued in 2019, the report noted.

Liquidity remains adequate as People’s Bank of China, the central bank, lowered the required reserve ratio for around 1,000 smaller rural banks in May after cutting the RRR for all banks by one percentage point in January 2019.

In addition, PBOC has used short-term reverse repos and the one-year medium term lending facility to reduce money market volatility after the regulatory takeover of Baoshang Bank on May 24.

Risk aversion to small city and rural commercial banks in the interbank market has heightened and banks have become more reluctant to lend to non-bank financial institutions.

Moody’s expects Chinese regulators to maintain their broad policy objective of safeguarding financial stability but implement coming initiatives at a measured pace in view of a more challenging macroeconomic environment.