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Research Report

14/12/2020 17:31

China's top regional banks outperform smaller peers

[ET Net News Agency, 14 December 2020] Moody's Investors Service said in a new report
that the performance of China's 25 largest regional banks is supported by the country's
rebounding economy and their loan exposure to leading businesses in their operating
regions, reducing the systemic risk associated with regional banks' higher overall problem
assets and weaker capitalization as a group compared with other groups of banks.
"China's top regional banks will benefit from operating in regions that are key GDP
contributors to the economy, and a lending focus on stronger regional enterprises and
retail borrowers," said Yulia Wan, a Moody's Vice President and Analyst.
"Smaller regional banks are at greater risk of financial stress, given their exposure to
riskier regions and loans, but their issues should also be easier to resolve by
authorities thus containing contagion risk," added Wan.
Moody's expects the top regional banks will continue to outperform their smaller peers
in asset quality, profitability and capitalization, even as some metrics weaken to reflect
higher loan risks and structural adjustments in the Chinese economy despite the GDP
NPL formation will remain high and credit costs elevated, although for the top regional
banks countered by higher provision coverage, stronger capital ratios and better
The top regional banks will also outperform their smaller peers in profitability, thanks
to their faster migration to retail loans with more stable interest rates when compared to
corporate loans. Still, their growing exposure to the segment presents some risk in the
form of an increasing proportion of unseasoned and uncollateralized consumer loans.
Capitalization meanwhile will benefit from slowing risk-weighted asset growth as the top
regional banks increase their lending to segments with low-risk weights, such as
mortgages. Capital issuance will also be supported by efforts from Chinese authorities to
reduce system risk, along with more stringent capital requirements.
Still, the top regional banks will remain weaker than the large national banks in
profitability, capitalization and liquidity. (KL)

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