Banks' asset quality, profitability weaken in Q1

Chinese banks' asset quality, capitalization and profitability weakened in the first quarter of 2020 when disruptions from the coronavirus outbreak peaked, according to a recent industry report.

Asset growth of domestic commercial lenders rebounded to 10.7 percent at the end of March from 8.7 percent a year ago, driven by a pickup of growth in non-loan assets.

Moody’s Investors Service expects banks’ supply of non-loan shadow credit to increase in the remainder of 2020 because of slower implementation of asset management regulations in view of disruptions caused by the COVID-19 outbreak.

Liquidity within the banking system remained adequate. Commercial banks' average loan-to-deposit ratio fell to 74.9 percent at the end of March from a multi-year high of 75.4 a quarter ago, thanks to central bank's eased monetary policies to offset disruptions caused by the outbreak.

Banks, however, saw their asset quality weakening during the January-March period under the impact of the health crisis. The system's non-performing loan (NPL) ratio rose to 1.91 percent at the end of March, from 1.86 percent at the end of 2019, with regional banks showing a more pronounced rise in delinquency than nationally franchised banks.

The ratings agency anticipates considerable lag time before NPL metrics fully capture the increase in loan delinquency pressure. Asset pressure facing banks will remain high even after the coronavirus outbreak subsides as the affected businesses are highly sensitive to consumer sentiment, which will remain weak, it said.

Meanwhile, lenders’ capitalization has weakened on faster growth of risk-weighted assets and their profitability edged down. Annualized return on assets averaged 0.98 percent in the first three months, four basis points lower than a year ago.

The key driver of lower profitability is a narrowing of seven basis points in the net interest margins in this period, Moody’s noted in its quarterly banking report.

The company believes that banks’ credit costs will stay elevated despite multiple government relief measures, and profitability will remain pressured for the reminder of the year.