Loan demand to recover, but China’s banks still need to buff loss cushion

Good 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.

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 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.

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.

SECURING TALENT IS SINGAPORE FINTECHS’ TOP PRIORITY: PWC

Fintech firms in Singapore cited sourcing and retaining as their top priority over the next three to five years as it is one of the key obstacles to growth, according to a report by PwC.

The PwC survey showed that over 60% of the respondents are targeting to pool talent as failure to do so may hinder the progress of their organisational value chains and their “full potential.” They are addressing this by offering better job packages.

“[Whilst] various initiatives between the industry, policymakers and educational institutions are still in effect to increase the domestic supply of talent in the future, foreign talent is still set to play a substantial role in the competition for viable employees,” the report read.

The lack of suitable domestic talent and inability to bring in overseas talent to Singapore was the second main weakness in Lion City’s fintech industry that hinders growth, following the “too small” domestic market and more focus on larger ASEAN markets.

Funding

Following this, fintech firms are also focusing on funding, capital raising, and listing. They are also looking at entering new markets and offering new products and services.

The report also said that around 35% of the firm who said are focusing on expanding their footprint and products are categorised as “Seed” in their fundraising status, and another 20% are “unfunded.”

PwC said it reflects the need for the firms to grow rapidly as “it is logical for relatively nascent start-ups to focus on these areas equally in order to increase their market share and drive future investment concurrently.”