[ET Net News Agency, 8 April 2020] China-based banks face additional credit costs of
nearly RMB1.6 trillion (US$224 billion) over 2020. This is due to loan forbearance for
businesses disrupted by COVID-19 outbreak, S&P Global Ratings said in a report published
today, titled "Credit Costs For China's Banks Could Rise By US$224 Billion In 2020."
Loan forbearance such as payment holidays, reduced interest charges, and lengthened
maturities are an important type of financial support to alleviate the economic fallout
wrought by COVID-19.
"The rise in credit costs could be equivalent to more than half our pre-outbreak
estimate of sector net profits in 2020," said S&P's credit analyst Harry Hu. "The impact
to the sector's net profit in 2020 could be less, if banks opted to lower their provision
buffer."
The credit rating agency expects the Chinese banking sector's nonperforming assets, as
defined by S&P Global Ratings' criteria, to increase about 2 percentage points to 7.25%.
This is after taking the potential impact of forborne loans into consideration. S&P's
forward-looking assessments reflect the impact on bank earnings of the economic damage
from COVID-19, including S&P's view of a strong rebound in 2021.
However, reported nonperforming loans (NPLs) for China's bank are likely to around 2.2%
for 2020, a moderate increase from an estimated 1.74% at the end of 2019 (including policy
banks). This is because the agency expects forborne loans will receive a more lenient loan
classification, given the special circumstances amid the health emergency.
S&P anticipates many forborne loans to be classified as special-mention loans or
earmarked within the normal loan basket. A stricter recognition and provisioning is
unlikely because it could weaken banks and stifle their ability to pump fresh funds into
the economy.
"A sharp increase in NPLs and provisions would lift banks' credit costs, pressure
profitability, and in turn, their internal capital generating ability and capitalization,"
said Hu. "This would make it harder for the banks to offer credit stimulus or support the
economy."
China's requirements for provisions are among the highest in the world--at 150% of NPLs.
Therefore a major jump in NPLs would require a steep amount of funds to be set aside,
which would cut into banks' profits, capital, and ability to expand credit.
Many Chinese banks have been accumulating substantial provisions, due to the high
regulatory requirements. Because of this, they could afford to absorb a hit as large as
RMB1.6 trillion on rising credit costs. They would need to run down provision coverage to
do so, however.
However, if virus-related disruptions extend beyond S&P's estimated timeline, then the
chances of recouping delayed payments will diminish. Chinese banks would face more
pressure to recognize additional credit costs. (KL)