China’s Bigger Regional Banks Could Need Capital, S&P Says

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(Bloomberg) --

China’s banking system is facing greater risks than it seems as some bigger regional lenders are under pressure just like their smaller counterparts.

“Some of the relatively larger stress-tested banks could require sizable recapitalization,” said S&P Global Ratings credit analyst Ming Tan, citing tests conducted by the People’s Bank of China.

China’s vast network of regional banks is under pressure amid the slowest economic growth in three decades and rising loan defaults. The partially resolved trade dispute with the U.S. and a crackdown on shadow banking has weighed on the world’s second-biggest economy and its banks. Now, the spreading new coronavirus is adding further risk.

Policy makers last year took control of one bank and have orchestrated bailouts of others, including a $14 billion injection into Hengfeng Bank Co., a mid-sized lender that has failed to disclose its financial statements for two straight years. Three state-owned financial heavyweights, including Industrial & Commercial Bank of China Ltd., bought stakes in Bank of Jinzhou Co.

The stress test results of 30 banks show that China’s nonperforming loans are highly sensitive to the country’s economic growth, even for its sizable banks, the credit analyst said in the report. The central bank’s severe stress test model assumed growth slowing to 4.15%, down from 6.6% in 2018, according to S&P.

Citigroup on Friday said it expects China’s GDP growth to slow to 4.8% this quarter from 6.0% in the fourth quarter. It cut its full-year forecast for 2020 to 5.5% from 5.8%.

The credit rating company said that China Bohai Bank Co., China Zheshang Bank Co., and Shengjing Bank Co. are “under more pressure” than the other stress-tested banks, given their “significantly large” back acceptance (a form off-balance sheet funding) to total assets ratios.

Bohai Bank and Shengjing Bank couldn’t be reached for a comment. The person who answered the phone at Zheshang Bank said the company couldn’t immediately comment outside of working hours.

Even so, S&P said that PBOC has “gained a better handle” on financial risks and more measures will likely come.

“We expect the PBOC to roll out new regulation to address the banking system’s vulnerability to the governance, liquidity, and contagion risks revealed by its stress test,” S&P said.

©2020 Bloomberg L.P.

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