‘SMALL BANKS, BIG RISKS’ AMID SLUMP

Rural lenders bear brunt as economic slowdown exacerbates their weak fundamentals, analysts say

Small lenders will bear much of the risk in China’s banking industry as an economic slowdown caused by the country’s zeroCovid policy exacerbates their weaker fundamentals, according to Moody’s and CCXI.

“Medium-sized and small banks will be impacted by regional economic fluctuations and the pandemic, and in the future they will face more pressure to control their bad loan ratios and provision coverage ratios,” said Wen Yuqi, director of the financial institutions ratings department at CCXI, referring to the amount of capital they must set aside to cover soured loans.

She was speaking at the online CCXI & Moody’s China Credit Outlook Conference yesterday.

Town-level and rural banks were more exposed to risk than their larger peers even though their assets accounted for less than 1 per cent of the total among the nation’s banks, said Nicholas Zhu, vice-president at Moody’s.

The risk, if they got into trouble, was contagion, he added.

“We can’t say the risk is small,” he said. “Small rural financial institutions have potential systemic risks” that could spread to the wider financial sector.

He cited the Henan banking scam in April, in which 40 billion yuan (HK$43 billion) in deposits – gathered via fintech platforms – disappeared. The crisis affected customers nationwide because the deposits were made digitally rather than in a local branch.

“Very small rural financial institutions [can] have the effect of penetrating the whole nation on the liabilities side,” he said.

Rural banks had the highest bad loan ratios in the industry, at more than 3 per cent as of the end of September, the analysts said.

Their burden only grew when they were told by Beijing to help companies – particularly small businesses – that had been hit hard by the pandemic, said Wen at CCXI. The banks had loaned 16 trillion yuan to these companies as of the end of 2021, she added.

“Against the background that the economy still hasn’t recovered and amid the pandemic flare-ups, some of these loans’ payment at maturity still face uncertainties as these market participants haven’t got rid of the burden of the pandemic.”

The lenders’ recent increased aid to property developers under guidance by Beijing could also increase their burden.

The extension of loans to developers for as long as 2½ years, as stipulated in an official 16-point rescue plan to ease home builders’ financial pressure, could add further uncertainty, said Zhu, as the outlook for the sector remained decidedly gloomy.

Additionally, homeowners’ efforts to pay back their mortgages earlier in a bid to ease their own debt burdens were forcing banks to reinvest the proceeds in other assets, which made it hard to ensure big returns under current market conditions, he added.

On the broader economy, Mao Zhenhua, CCXI’s founder and chief economist, predicted that growth would be about 5 per cent in 2023, accelerating from a low base this year, as Beijing loosened Covid-19 restrictions. UBS also forecast 5 per cent, while Goldman Sachs expects 4.5 per cent and Barclays foresees a 3.8 per cent growth rate.

Mao said policies aimed at curbing the coronavirus would be the biggest factor determining economic growth next year.

“If next year it can’t reach 5 per cent, then it may not reach 5 per cent for a very long time, because next year’s target already factored in the low base,” he added.

If next year [growth] can’t reach 5 per cent, then it may not reach [it] for a very long time

MAO ZHENHUA, CCXI CHIEF ECONOMIST