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Quarterly Snapshot on China's Banking Sector

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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 2 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 3 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 4 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. 5 Contents Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research 6 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 15 210 10 150 5 (Tril.) (%) AFRE AFRE Growth Rate (Right Axis) Source: PBOC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 7 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 Source: CBIRC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 8 All provinces except one experienced positive loan growths in the first quarter Loan Growth Rate YoY in Different Regions 20 15 10 5 0 (5) (%) 2019Q1 2020Q1 Source: PBOC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved 9 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) Source: PBOC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 11 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 Source: PBOC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 12 Contents Industry Outlook Business Position Capital and Earnings Risk Position Funding & Liquidity Government Support Appendix: Related FI Research 13 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 Source: CBIRC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 14 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 Source: CBIRC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 15 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 Source: Wind, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 16 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 Source: Wind, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 17 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 Source: CBIRC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 18 Increase of non-interest income can mitigate the profitability pressure from NIM compression Non-interest Income/Operating Revenue 30 25 20 15 (%) Source: CBIRC, collected and adjusted by S&P Global (China) Ratings. Copyright © by 2020 S&P Ratings (China) Co., Ltd. All rights reserved. 19 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 Source: CBIRC, collected and adjusted by S&P Global (China) Ratings.
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