Quarterly Snapshot on China's Banking Sector

Quarterly Snapshot on China’s Banking Sector

First Quarter of 2020

May 2020 Contents

Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research

Industry Outlook

Factor Trend Comments  Rapid credit growth in the first quarter as banks pump Business Stable loans into the real economy to fight the virus Position  We expect the whole year business growth to be robust  We expect weaker profitability in 2020 owning to NIM compression and impairment charges  Capital will probably come under pressure due to rapid Stable with credit expansion and weaker profitability Capital & downward  We expect the banking sector’s overall capital to remain Earnings pressure adequate but more capitalization pressure will be felt by small banks  The stable outlook is based on a U-shape economic recovery for 2020 and 2021

Industry Outlook (cont.)

Factor Trend Comments  The economic disruption caused by coronavirus outbreak is expected to have a negative impact on asset quality Stable with  We expect the bad debt pressure to be manageable for Risk Position downward banks with good financial health before the pandemic pressure  In addition to the pandemic, a few small banks are also troubled by legacy bad debts Stable with  The central bank is expected to maintain ample Funding & upward systemwide liquidity in 2020 to maintain financial stability Liquidity trend  The inter-bank market funding cost is lower than 2019  Although there is downward pressure on asset quality and profitability, the overall stand-alone credit quality of the Stable with sector is expected to remain stable as the mega banks Stand-alone downward and leading joint-stock banks had good financial health Credit Quality pressure before the pandemic  Credit divergency among banks in terms of stand-alone credit quality will become more obvious with COVID-19

Industry Outlook (cont.)

Factor Trend Comments  Banking sector is a very important channel to provide credit to real economy to speed up economic recovery Stable with from COVID-19. Government upward  Government encourages small and mid-sized banks to Support trend lend more to small businesses.  Government has been taking effective measures to recapitalize troubled banks recently.  We expect the government’s willingness to support the Issuer Credit banking sector to become stronger to maintain financial Stable Quality stability and mitigate the economic uncertainty caused by the outbreak.

Contents

Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research

Financing activities accelerated in March as credit is pumped into real economy to fight COVID-19

Aggregate Financing to the Real Economy (AFRE) 270 20

210

150 5

(Tril.) (%)

AFRE AFRE Growth Rate (Right Axis)

Joint-stock banks had the highest asset growth rate in the first quarter

Banking Sector Asset Growth YoY Asset 2019 2020 30 growth Q4 Q1 YoY (%) Industry 9.1 10.8 average Mega 8.2 10.4 15 banks

Joint-stock 10.2 12.8 banks

City banks 8.5 8.3 0 Rural (%) 7.6 8.2 banks

Banking Sector Mega Banks Joint-stock Banks City Banks Rural Banks

All provinces except one experienced positive loan growths in the first quarter Loan Growth Rate YoY in Different Regions 20

(5) (%) 2019Q1 2020Q1

In the first quarter, mega banks significantly increased their lending to small and micro businesses

Loans to Small and Micro Businesses

12 Small and micro loan growth 2019Q4 2020Q1 compared to the last quarter (%)

Industry average 3.17 7.60

6 Mega banks 3.06 15.19

Joint-stock banks 3.63 3.35

City banks 4.64 5.66

Rural banks 2.08 5.24 0 2019-03 2019-06 2019-09 2019-12 2020-03

(Tril.) Mega Banks Joint-stock Banks City Banks Rural Banks

Note: Small and micro businesses loans are defined by CBIRC as loans less than 10 million RMB. Source: CBIRC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 10

Government intends to maintain stability of property market

Mortgages and Real Estate Development Loans 40,000 20

20,000 10

0 0 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 (Bil. RMB) (%) Mortgage Real Estate Development Loans Growth Rate of Mortgage YOY (Right Axis) Growth Rate of Real Estate Development Loans YOY (Right Axis)

Retail deposits increased by 8% and fiscal deposits dropped by 8% in the first quarter Deposits as of end Growth in Q1 2020 Breakdown of of Q1 2020 compared with end deposits as of end of (Bil. RMB) of 2019 (%) Q1 2020 (%) 1. Domestic Deposits 2,039,925.56 3.99 98.54 1.1 Deposits of Households 886,551.42 7.95 42.83 1.1.1 Demand Deposits 312,306.53 4.54 15.09 1.1.2 Time & Other Deposits 574,244.89 9.89 27.74 1.2 Deposits of Non-financial Corporates 637,710.10 2.89 30.81 1.2.1 Demand Deposits 246,984.42 -2.89 11.93 1.2.2 Time & Other Deposits 390,725.68 6.92 18.87 1.3 Deposits of Government Institutions 300,068.33 0.58 14.50 1.4 Fiscal Deposits 37,695.57 -7.70 1.82 1.5 Deposits of Non-depository Financial 177,900.14 -1.93 8.59 Institutions 2. Overseas Deposits 30,213.03 13.02 1.46 Total Deposits 2,070,138.59 4.11 100.00

Contents

Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research

Overall capital adequacy ratio and capital quality metrics remain stable in the first quarter

Reported Capital Adequacy Ratio (CAR) 15 Capital quality 2019Q4 2020Q1 metrics (%) Core tier-1 capital/Total 74.59 74.88 12 capital Tier-1 capital/Total 81.63 82.17 capital Tier-2 capital/Total 18.37 17.83 9 capital (%)

Total CAR Tier 1 CAR Core Tier 1 CAR

Banking sector’s capital dropped mildly in the first quarter mainly due to rapid loan growth

Reported Capital Adequacy Ratio CAR (%) 2019Q4 2020Q1 22

Industry 14.64 14.53 average

Mega banks 16.31 16.14 16 Joint-stock 13.42 13.44 banks

City banks 12.70 12.65

10 Rural banks 13.13 12.81

Foreign bank (%) 18.40 18.43 Industry Average Mega Banks Joint-stock Banks subsidiaries City Banks Rural Banks Foreign Bank Subsidiaries

Hybrid bond will remain an important source of bank capital buffer in 2020 Bank Hybrid Bond Issuance Bank Hybrid Bond Issuance (by Bond Type) (by Bank Type) 1,400 1,400

700 700

0 0 (Bil.) (Bil.)

Subordinated Bond Tier-2 Capital Bond Mega Banks Joint-Stock Banks City Banks Rural Banks Perpetual Bond Foreign Bank Subsidiaries

Listed banks reported a noticeable increase of impairment charges in the first quarter

Provision/Operating Income Distribution of Selected Listed Banks Provision/ 10 Operating 2019Q1 2020Q1 income (%)

Average 26.23 27.86

5 Median 30.53 35.07 Number of BanksNumber Minimum 16.43 15.84

0 Maximum 56.09 53.98 17 21 25 29 33 37 41 45 49 >49 (%)

2019Q1 2020Q1

Net interest margin dropped in the first quarter as the government pushed for lower funding cost for the real economy

Net Interest Margin (NIM) NIM 2019Q 2020Q 3.50 (%) 4 1 Industry 2.20 2.10 average Mega 2.12 2.04 banks 2.50 Joint-stock 2.12 2.09 banks City banks 2.09 2.00 Rural banks 2.81 2.44 1.50 Foreign (%) bank 1.78 1.70 subsidiaries

Industry Average Mega Banks Joint-stock Banks City Banks Rural Banks Foreign Bank Subsidiaries

Increase of non-interest income can mitigate the profitability pressure from NIM compression

Non-interest Income/Operating Revenue

15 (%)

Mega banks remain the most profitable subsector in China’s banking industry Return on Assets (ROA) ROA 2019 2020 (%) Q1 Q1 1.80 Industry 1.02 0.98 average Mega bank 1.07 1.02 Joint-stock 1.00 1.01 0.99 bank City bank 0.89 0.81

Rural bank 1.07 0.98 0.20 Foreign (%) bank 0.64 0.86 subsidiaries

Industry Average Mega Banks Joint-stock Banks City Banks Rural Banks Foreign Bank Subsidiaries

COVID-19 didn’t have a noticeable impact on banks’ bottom lines in the first quarter but we expect negative pressure in the following quarters due to NIM compression and impairment charges

Return on Equity (ROE) of China’s Commercial Banking Industry

(%)

Contents

Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research

Problematic loans increased in the first quarter, but the increase of bad debt ratio was not as significant due to overall loan growth

Loan Classification 2019 2020 Problematic Loan Growth Rate Compared with the (%) Q4 Q1 20 Previous Quarter Normal Loans 95.23 95.12

15 Special Mention 2.91 2.97 Loans 10 Non-performing 1.86 1.91 Loans 5 - Substandard Loans 0.78 0.84

0 - Doubtful Loans 0.78 0.78

(5) (%) - Loss Loans 0.30 0.29 Normal Loans Special Mention Loans Non-performing Loans

Regional banks have the highest bad debt pressure

Non-performing Loan (NPL) Ratios NPL Ratio 2019Q4 2020Q1 4.50 (%) Industry 1.86 1.91 average

Mega bank 1.38 1.39 2.50 Joint-stock 1.64 1.64 bank

City bank 2.32 2.45 0.50

(%) Rural bank 3.90 4.09

Foreign bank Industry Average Mega Banks Joint-stock Banks 0.67 0.71 subsidiaries City Banks Rural Banks Foreign Bank Subsidiaries

Listed banks kept their bad debt ratios stable in the first quarter, but we expect an increase in the second half of 2020

NPL Ratio Distribution of Selected Listed Banks

15 NPL Ratio 2019 2020 (%) Q4 Q1

10 Average 1.43 1.43

Median 1.41 1.43

Number of BanksNumber 5 Minimum 0.78 0.78

Maximum 2.37 2.35 0 1.0 1.2 1.4 1.6 1.8 2.0 2.2 >2.2 (%) 2019Q4 2020Q1

Note: The selected list banks include ICBC, CCB, ABC, BOC, PSBC, BoCom, CITIC Bank, CMB, CEB Bank, SPD Bank, China Minsheng Bank, Huaxia Bank, Ping An Bank, Industrial Bank, CZ Bank, Bank of Ningbo, Bank of Shanghai, Bank of Beijing, Bank of Nanjing, Bank of Jiangsu, Chongqing Rural Commercial Bank, Bank of Hangzhou, Bank of Suzhou, Bank of Chengdu, Bank of Changsha, Bank of Guiyang, Qingdao Rural Commercial Bank, Bank of Xi’an, Bank of Qingdao, Bank of Zhengzhou, CRCB, Zijin Rural Commercial Bank, ZRC Bank, Wuxi Rural Commercial Bank, Jiangyin Rural Commercial Bank, SZRCB. Source: Wind, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 25

Mega banks reported stable metrics of asset quality and their credit costs didn’t change much in the first quarter

Reported Non-performing Loan Ratio New Provision/Operating Income

2 30

1 15 NPL NPL Ratio (%) Provision / Operating Income (%) Income / Operating Provision 0 0 ICBC CCB ABC BOC PSBC BoCom ICBC CCB ABC BOC PSBC BoCom

As of end of 2019 As of end of 2020Q1 2019 2020Q1

The banking sector didn’t increase its reserve buffer in the first quarter and we expect more provisioning pressure in the future Reserve Coverage Ratios 350 Reserve Coverage 2019Q4 2020Q1 Ratio (%)

Industry 186.08 183.20 average 225 Mega banks 234.33 231.70

Joint-stock 192.97 199.89 banks

100 City banks 153.96 149.89 (%) Rural banks 128.16 121.76

Industry Average Mega Banks Joint-stock Banks Foreign bank 313.90 299.33 City Banks Rural Banks Foreign Bank Subsidiaries subsidiaries

Pandemic - caused impact wasn’t fully reflected in the first quarter numbers

 In our opinion, the lagging effect of NPL classification and the forbearance measures given to some borrowers have contributed to the stability of asset quality metrics in the first quarter. Because banks typically classify 90+ or 60 + days overdue loans as NPL, the asset quality pressure caused by the pandemic hasn’t been fully reflected in the first quarter numbers. We expect more bad debt pressure in the second half of the year. But the final asset quality impact of COVID-19 is far from certain, highly dependent on the progress of economic recovery later this year.  The forbearance measures given to borrowers inevitably leads to looser NPL classification practices of banks in the short term. We see this as a temporary setback of the regulator’s efforts to achieve more stringent bad debt recognition. Typically, the forbearance given to small and medium-sized enterprises will end by June 30 this year. Therefore, we may only get to know the actual impact of the pandemic on asset quality in the second half of the year.

Contents

Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research

Large and mid-sized banks’ average liquidity coverage ratio has been improving

Loan to Deposit Ratio Liquidity Coverage Ratio

80 160

135

65 110 (%) (%)

Note: This chart only includes the data of banks with an asset size over 200 billion RMB.

As China loosens its monetary policy to deal with the pandemic, average interest rate of negotiable certificates of deposits dropped significantly, easing the liquidity and funding cost pressure for small banks

Coupon Rates of 3-Month Negotiable Certificates of Deposits Mega Banks Joint-stock Banks City Banks Rural Banks 5.5

3.3 Coupon (%) Rate

1.0

Contents

Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research

Defusing High-risk Banks – Hengfeng Bank What's Happened Views of S&P Global China Ratings  Hengfeng Bank, a mid-sized joint-stock bank based  Both the central government and in Shandong, reduced its NPL ratio from 28% as of Shandong government played the end of 2018 to 3.4% as of the end of 2019 by important roles in the recapitalization selling and writing off non-performing assets. As of of Hengfeng Bank, reflecting our view the end of 2019, its tier-1 capital ratio was 12.26%, that any bank bailout is coordinated significantly improved from -11.14% as of the end of efforts among different levels of 2018 thanks to government-led capital injection. government.  In December 2019, Hengfeng Bank issued 100  The large equity injection by the billion shares, of which Central Huijin Investment Ltd. government indicates its strong subscribed for 60 billion, Shandong state-owned willingness to bail out joint-stock distressed asset management company (“AMC”) banks, even the smaller ones. subscribed for 36 billion.  After the capital injection, the next  After the capital injection, Hengfeng Bank's equity step is to enhance the bank’s reached 111.21 billion yuan, representing an almost corporate governance and risk ten times increase of its equity. management to make it sustainable in the long term.

Government intervention has brought a deeply undercapitalized bank back to normal

Reported Tier-1 Capital Adequacy Ratio Reported Non-performing Loan Ratio of of Hengfeng Bank Hengfeng Bank 15 30

5 20

0 2014 2015 2016 2018 2019 -5 10

-10

0 -15 2014 2015 2016 2018 2019 (%) (%)

Note: Because the bank didn’t publish its 2017annual report, the data in 2017 is not available. Source: Annual Reports of Hengfeng Bank, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 34

Defusing High-risk Banks – Bank of Jinzhou Views of S&P Global What's Happened (China) Ratings  As of the end of 2019, Bank of Jinzhou’s reported core tier-1  The government has capital adequacy ratio was 5.14% and NPL ratio was 6.52%, and it taken effective reported a net loss of RMB 1 billion in 2019. measures to replenish  In 2019, the investment company under ICBC and two destressed Bank of Jinzhou’s AMCs owned by the central government invested in the equity of capital base and clean the bank. This year, more recapitalization measures are planned. up its legacy bad debts. The bank plans to issue new shares to a government owned entity  The government controlled by PBOC and a local SOE owned by the provincial intervention will help government. mitigate the market’s  The bank plans to sell off its problematic assets with a book value concern over the credit of RMB 150 billion for RMB 45 billion to a PBOC controlled entity. quality of a few small  After the completion of all these transactions, the government and mid-sized banks owned entity controlled by PBOC will hold about 38% of the total with troubling high bad equity of Bank of Jinzhou. debt ratios.

Capital injection and bad debt cleanup have been two major measures to save a troubled bank

Reported NPL+SML Ratio of Bank of Reported Net Income/Loss of Bank of Jinzhou 12,000 Jinzhou 25 NPL Ratio SML Ratio 8,000 20

4,000 15

10 0 2014 2015 2016 2017 2018 2019

5 (4,000)

0 (8,000) (%) 2014 2015 2016 2017 2018 2019 (mil.)

Note: Since Bank of Jinzhou hasn’t release its 2019 annual report, its SML ratio data in 2019 is not available Source: Annual Reports of Bank of Jinzhou, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 36

Capital injection has been critical to the sustainability of Bank of Jinzhou

Note: The asset, liability and equity data are as of the end of 2019. Source: Annual Reports of Bank of Jinzhou, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 37

Defusing High-risk Banks – Bank of Gansu

Views of S&P Global What's Happened (China) Ratings  In early April, Bank of Gansu, a mid-sized city bank in Northwest  Local SOEs, China, experienced sharp stock price drop on H-share market coordinated by the due to forced sale of its shares which had been collateralized by provincial its shareholders. Its stock price dropped by 43% on April 1st. government, are  Due to the unusual stock market fluctuation, the bank playing a key role in experienced small-scale bank run which was quickly stopped its recapitalization. after intervention by the central bank and regulator.  We don’t expect  The bank has asset quality woes. As of the end of 2019, its NPL imminent crisis of this ratio was 2.45% and its SML ratio was 5.41%. In addition, its regional bank as the overdue loans accounted for 9.18% of its loan book. government and  The Gansu provincial government has found new equity central bank are keen investors, mainly local state-owned enterprises (SOE), for its to maintain financial troubled city bank. stability.

Defusing High-risk Banks – Baoshang Bank

What's Happened Views of S&P Global (China) Ratings  The central bank announced the setup  The year-long efficient and orderly takeover and of a new Mengshang Bank to take over restructuring of Baoshang Bank since May 2019 Baoshang Bank’s business within Inner helps maintain market stability and control Mongolia. Baoshang Bank’s four contagion risk among regional banks. branches outside Inner Mongolia were  We believe the probability of another high-profile sold to Huishang Bank, a city bank who bank incident like Baoshang Bank takeover in suffered credit loss in Baoshang Bank’s 2020 is very low. As the economy is recovering restructuring. from the pandemic, maintaining financial stability is a top priority for the government.  In 2020, we expect stronger government supports for the banking sector which is key to providing credit to the real economy to help recovery from COVID-19.

Contents

Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research

Snapshot on Rated Banks

Domestic Foreign Anchor: bbb+ Luzhou Bank Shanghai Rural Postal Savings JPMorgan Chase Commercial Bank Bank of China Bank (China) Business Position -2 0 +2 -1 Capital & Earnings 0 0 0 +2 Risk Position 0 +1 +1 +2 Funding & 0 +1 +2 0 Liquidity

SACP bbbspc- aspc aaspc aspc+ External Support Government Government Government Group Support Notching +1 +2 +2 +4

ICR BBBspc AAspc- AAAspc AAAspc Outlook Stable Stable Stable Stable

Related Issuer Research

Credit Rating Report: JPMorgan Chase Bank (China) Company Limited, Feb 24 2020

Credit Rating Report: Shanghai Rural Commercial Bank Co., Ltd., Jan 14 2020

Bulletin: SRCB Continues to Maintain Good Asset Quality, April 22 2020

Credit Rating Report: Postal Savings Bank of China Co., Ltd., Jan 3, 2020

Bulletin: PSBC’s 2019 Financial Performance in Line with Expectations, March 26 2020

Credit Rating Report: Luzhou Bank Co., Ltd., July 30 2019

Bulletin: Luzhou Bank’s Credit Quality Remains Stable, 30 March 2020

Related Industry Research Chinese Mega Banks Reported Good Profitability in the First Quarter but Still Face Uncertainty, May 11 2020

Mega Banks: Strong Enough to Withstand COVID-19, April 24 2020

City Banks: Indispensable Financiers of China’s SMEs, March 24 2020

The Role of Rural Banks in China’s County Economy -- A Study into the Creditworthiness of China’s Rural Banks, March 24 2020

Key Differentiation Factors of Credit Quality of Domestic Banks in China, March 3 2020

Small but Solid – Foreign Bank Subsidiaries as Niche Players in China’s Banking Sector, Feb 26 2020

Strong and Steady – Mega Banks as the Pillars of China’s Banking Sector,Jan 9 2020

Diversity Across China’s Banking System – A Deep Dive, Oct 21 2019

Criteria and Criteria-Related Commentaries

Methodology: Financial Institutions

Commentary: Understanding S&P Global (China) Ratings Financial Institutions Methodology

Analytical Contact

• Ying Li, CFA, FRM • Yifu Wang, CFA, CPA • Beijing • Beijing • +86-10-6516-6061 • +86-10-6516-6064 • [email protected] • [email protected]

• Xiaochen Luan, CFA, FRM • Cong Cui • Beijing • Beijing • +86-10-6516-6069 • +86-10-6516-6068 • [email protected] • [email protected]

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