FIRST better than we previously expected, whilste growth in the banks’ risk-weighted assets has slowed. Proactive issuance of regulatory capital instruments by the big four banks over the past few years has also narrowed the shortfall,” Huang said.
China’s big four banks are still US$550m short of reaching the TLAC provision
Loan demand to recover, but China’s banks still need to buff loss cushion
LENDING & CREDIT
G
ood news and bad news for Chinese banks–they can look forward to a recovery of loan demand this year, but their biggest banks will need to beef up their bad loan buffers to meet international requirements. In a report, ratings agency S&P stated that the country’s four biggest banks are still US$550m (RM3.7t) short of meeting the total loss-absorbing capital or TLAC provision in order to meet international requirements for global systemically important banks. The Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China are required to hold TLAC that is equal to 16% of their risk-weighted assets by 1 January 2025. Loss-absorbing capital is not paid back in the event of major losses at banks. Instead, the capital is used to “absorb losses,” and thus reduce the need and likelihood of governments bailing out the institutions, according to S&P.
8 ASIAN BANKING & FINANCE | Q1 2023
Expect more bond issuances This, coupled with new regulations in 2022 that widen channels for TLAC-eligible issuances from these banks, drive S&P’s belief that there should be a flurry of issuance of senior non-preferred bonds by the big four banks. “A wider range of TLAC-eligible instruments will help China’s big four banks to narrow gaps in regulatory capital requirements set to come into effect in 2025,” noted S&P Global Ratings credit analyst Michael Huang. On the upside, the banks have done well against S&P’s estimates. The ratings agency’s 2020 report had estimated that the lenders will have a RMB6t gap as the deadline approached. “Our forecast for the gap has narrowed in part because bank profits have been
Recovering demand China’s banks could also enjoy an increase in retail loan demand and decrease in loan delinquencies. The reopening of the country’s borders and easing of anti-COVID policies are expected to increase retail loan demand and decrease loan delinquencies. China reopened its border on 8 January, a move that UOB Kay Hian analyst Sabrina Soh expects to translate to substantial benefits for the country’s banks. “[A] more robust demand should support loan volume and pricing, stronger corporate and household balance sheets should support asset quality, and the improved risk appetite of the household sector and an increase in business/ household activities should boost fee income growth,” Soh wrote in a report. In 2022, China’s household loans increased only by RMB3.83t in 2022, about RMB4t short of the growth reported in 2021. Property sales have also fallen 25% in 2022, which meant that banks also provided fewer mortgage loans. Lending growth is expected to be supported by the government’s overall plan to rebuild the $17t economy following the COVID-induced slump in 2022. “We anticipate further measures to boost housing demand in 2023. These plans could include further reductions in mortgage interest rates, down payment requirements, and loosening limitations on property purchases in China’s premier cities,” Soh said. China Merchants Bank in particular is expected to “grasp the full benefits of the retail rebound resulting from the reopening of borders and real estate policy,” according to Soh. “China Merchants Bank’s retail competitive advantage is still compelling from a longterm perspective, the bank’s profitability has continuously surpassed its peers, and the forward looking strategic structure has become the key driver of the premium valuation over time. In addition, we believe that the good long-term trend in the China wealth management market has not changed,” Soh added.
Our forecast for the gap has narrowed in part because bank profits have been better than we previously expected
