China’s financial system «may be less resilient» than it appears, according to an S&P note which highlighted «sizeable recapitalization» required for some banks that could risk cracking under stress.
«Chinese banks are more vulnerable to idiosyncratic risks, arising from governance-related issues and risk management deficiency than systemic ones,» said S&P credit analyst, Ming Tan, in a research note. «Bank acceptance exposure and delayed financial reporting are among the key indicators of such risks. The quality of information and corporate action signals are important too.»
Following a stress test conducted in 2019, the People’s Bank of China (PBoC) gained a «better handle» on financial risks involved and adopted more realistic assumptions about matters such as increased bank funding costs. The stress test found that five out of the 30 banks tested would fail to meet a 5 percent common equity tier ratio – a key indicator of lender health – while seven would fail to meet the 6 percent threshold.
More Bailouts in 2020
Stress tests were conducted following headline failures in China’s banking system which led to the seizure of Bashing Bank, Bank of Jinzhou and Hengfeng Bank. PBoC's intervention last year marked the first state-backed bailout to lenders in 20 years.
Similar bailouts are expected to persist in 2020 based on the bank acceptance exposure relative to total assets – a key risk indicator. According to Tan, a higher ratio could signal governance issues as bank acceptances are susceptible to abuse such as for regulatory arbitrage. And based on these assumptions, S&P highlighted Bohai Bank, China Zheshang Bank and Shengjing as lenders that will likely be in need of «sizeable recapitalization».
The note added that China’s non-performing loans will remain highly sensitive to GDP growth, even for larger banks, making the financial system vulnerable to a slowdown which is being further exacerbated by the deadly Wuhan coronavirus outbreak.
