Fitch: Asset Quality to Remain Major Issue for China Banks

China Everbright Environment

07/04/2016 08:24

(The following statement was released by the rating agency)

SHANGHAI/HONG KONG/SINGAPORE, April 07 (Fitch) Chinese bank earnings reported 
for 2015 underscored growing pressures on profitability for the sector from 
asset-quality deterioration, as Fitch Ratings had expected. These pressures are 
likely to remain in 2016, with slowing economic growth contributing to higher 
NPL formation rates. Weaker profitability combined with strong asset growth will 
increase capital pressures for banks. 

Fitch-rated Chinese banks reported a sharp deceleration in net profit and 
revenue growth. On a weighted average basis for the 11 Fitch-rated Chinese 
banks, revenue and net profit rose by 8.2% and 1.3%, respectively. This compares 
with 13.0% and 7.2%, respectively, in 2014. Average return on assets (ROA) fell 
by 11bp to 1.09%. 

Higher provisioning pressures was the key factor squeezing profitability. The 11 
banks' weighted average NPL ratio rose to 1.66% from 1.23% a year earlier. The 
weighted-average 'special mention' (SML) and overdue loan ratios increased to 
3.48% and 2.64%. The growth of these two metrics decelerated in 2H15, which we 
believe to be more a reflection of managing provision coverage via more 
aggressive loan write-offs and disposals and less prudent classifications, than 
a slowdown in asset-quality deterioration. 

The weighted average NPL coverage ratio declined significantly to 166%, down by 
54ppt and close to the regulatory limit of 150%. Local media reports suggest 
that the authorities are considering lowering the provisioning requirement to 
130%-140% for selected banks. Of the 11 Fitch-rated banks, China Construction 
Bank, Bank of China and Minsheng Bank had NPL coverage ratios less than 155%, 
implying higher provision pressures unless the regulatory threshold are lowered. 
 

Such a regulatory change should not have major ratings implications. Relaxing 
the NPL coverage limit should ease some of the pressure on banks' profitability, 
but it may raise broader issues on the stability of the system. Relaxing 
standards at a time of system stress would also raise questions about the 
robustness of the regulatory regime. 

Chinese bank capitalisation was generally stable in 2015. Reported 
capitalisation at state-owned banks and mid-tier lenders improved modestly, 
either through slower asset expansion or external capital raising, or a 
combination of the two. 

That said, rising off-balance-sheet exposures may mask some capital consumption. 
Wealth management products (WMPs) are a case in point. The outstanding WMP 
balance - for banks reporting the numbers - increased by 46%, of which the 
majority was recorded off-balance sheet. WMPs are typically managed directly by 
banks, and issuance is often used to offload assets from their loan books. As 
such, credit risk may be hidden in these off-balance-sheet items. This is 
especially the case with the history of banks bailing out investors in failed 
WMPs. As such, Fitch believes that banks' capital positions may be less robust 
when considering the risks posed by off-balance-sheet WMPs. 

Mid-tier banks have been the most aggressive in issuing WMPs. China Everbright 
Bank and China Merchants Bank had the highest outstanding WMPs/assets ratios 
among banks reporting 2015 WMP numbers, at 39% and 33% of total assets, 
respectively. 

Furthermore, continued fast growth plans, especially at mid-tier lenders, means 
that capital pressures will persist in 2016. This is especially the case as 
ongoing profitability pressures will translate into weaker internal capital 
generation capabilities. This will continue to weigh on Chinese banks' Viability 
Ratings.

Contacts:

Jaclyn Wang

Associate Director

Financial Institutions

+86 21 5097 3189

Fitch Ratings (Beijing) Ltd. Shanghai Branch

1015, 10/F, IFC Tower A, HSBC Building

8 Century Avenue, Pudong

Shanghai 200120, China

Jonathan Cornish

Managing Director

Financial Institutions

+852 2263 9901

Justin Patrie

Senior Director

Fitch Wire

+65 6796 7232

Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: 
leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF 
CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE 
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS 
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED 
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH 
WEBSITE