The picture shows the Lujiazui financial district in Shanghai on June 7, 2022.
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BEIJING – Ratings agency Moody’s said on Wednesday it maintained its “negative” outlook on China’s banking sector due to a slow recovery from the end of Beijing’s Covid containment measures.
China’s economy has missed a national growth target for 2022 due to the spread of a highly contagious omicron variant and a prolonged downturn in the massive real estate sector. Although Beijing ended its strict Covid controls in early December, So far, the economic rebound has remained sluggish.
“For both borrowers and lenders, the challenging adjustment to exiting COVID-19 will affect banks’ asset quality and profitability over the next 12 to 18 months,” Moody’s said in a report on Wednesday.
“Our outlook for the banking sector remains negative,” said the report’s authors, vice-governor Nicholas Zhu and deputy managing director Chen Huang.
In November, Moody’s downgraded its outlook for China’s banking sector to “negative” from “stable” due to “deteriorating operating conditions, asset quality and profitability.”
The rating agency affirmed its negative outlook earlier this month. Wednesday’s report focused on fourth-quarter data from Chinese banks.
Fu Linghui, a spokesman for China’s National Bureau of Statistics, told reporters on Wednesday that the epidemic has damaged the balance sheets of companies and individuals in the past few years, and even if the overall economy is recovering, it will take time to repair these balance sheets.
The latest data from the Bureau of Statistics shows that the growth rate of industrial production in the first two months of this year was lower than expected, retail sales were in line with expectations, and investment in fixed assets was better than expected.
Non-performing loan risk
According to Moody’s analysts, the asset quality of Chinese banks is at risk of non-performing loans.
While these non-performing loans have not grown significantly, they say the economic environment has made it difficult for lenders and borrowers to find new sources of growth.
“New non-performing loan formation is likely to remain elevated amid the difficult adjustment from a zero-COVID exit,” the report said. “We expect banks to steadily dispose of bad loans over the next 12-18 months to stabilize non-performing loan ratios at current levels 1.63% level.”
Assets in China’s banking sector grew by 10.8% last year, higher than the 8.6% growth rate in 2021, the report said.
“We expect loan growth to pick up over the next 12 to 18 months, in response to calls from authorities for more financing as the economy reopens.”
Meanwhile, analysts said they expected lower asset yields to limit bank profits. They noted that banks’ return on average assets fell three basis points year-on-year in the fourth quarter.
Moody’s said it expects Chinese banks’ capital to remain stable and liquidity sufficient.
In addition to modestly increasing government stimulus, Moody’s said it expects Beijing to place greater emphasis on maintaining financial stability, including preventing risks to the banking system.
Preventing and defusing risks is one of the government’s policy priorities that Premier Li Qiang put forward in a speech to the media on Monday.