Moody’s adverse outlook on Chinese language banks as nation emerges from Covid-zero

Pictured here is Shanghai’s Lujiazui Financial District on June 7, 2022.

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BEIJING — Ratings agency Moody’s said on Wednesday it maintained a “negative” outlook on China’s banking sector following a protracted recovery after Covid controls ended in Beijing.

China’s economy missed a national growth target in 2022 due to the spread of the highly contagious Omicron variant and an ongoing slump in the massive real estate sector. While Beijing ended its strict Covid controls in early December, the economic recovery has so far been muted.

“Challenging adjustment to the zero-COVID exit for both borrowers and lenders will weigh on bank quality and profitability over the next 12 to 18 months,” Moody’s said in a statement on Wednesday.

“Our outlook for the banking sector remains negative,” said Vice President Nicholas Zhu and Associate Managing Director Chen Huang, the report’s authors.

Moody’s revised its outlook for China’s banks to negative from “stable” in November due to “deteriorating operating environment, asset quality and profitability.”

The rating agency confirmed its negative outlook earlier this month. Wednesday’s report focused on fourth-quarter data on Chinese bank operations.

The pandemic has damaged the balance sheets of companies and individuals in recent years, and it will take time to repair them even if the overall economy recovers, China’s National Statistics Bureau spokesman Fu Linghui told reporters on Wednesday.

The latest data from the Bureau of Statistics showed slower-than-expected industrial production growth, retail sales that were in line with expectations and better-than-expected fixed capital formation for the first two months of the year.

Risks from bad loans

Chinese banks’ asset quality is at risk from bad loans, analysts at Moody’s said.

Though these bad loans aren’t growing significantly, they said the economic environment is making it harder for lenders and borrowers to find new sources of growth.

“NPL creation is likely to remain high given the challenging adjustment to the zero-COVID exit,” the report said. “We expect banks to continuously deleverage bad debts over the next 12 to 18 months to keep the NPL ratio stable at the current level of 1.63%.”

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Chinese bank assets grew 10.8% last year, faster than the 8.6% growth in 2021, the report said.

“We expect credit growth to pick up over the next 12 to 18 months in response to authorities’ calls for increased funding as the economy reopens.”

Meanwhile, analysts said they expect lower investment yields to weigh on bank profits. They found that banks’ average return on assets fell three basis points year-on-year in the fourth quarter.

Moody’s said it expects Chinese banks’ capitalization to remain stable, with adequate liquidity.

In addition to a modest increase in government stimulus, Moody’s expects Beijing to place more emphasis on maintaining financial stability, including avoiding risk in the banking system.

Preventing and mitigating risks has been one of the government’s policy priorities, outlined by Premier Li Qiang in a press statement on Monday.

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