Several Chinese banks see CET1 ratios erode in Q2 2023 amid economic headwinds

Several mainland Chinese banks posted declines in their common equity Tier 1 ratios in the second quarter, though buffers built over prior years will likely help protect their earnings.

All four megabanks based in mainland China — Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd. — were among 19 lenders that posted declines in the key measure of capital adequacy in the April-to-June quarter, according to data compiled by S&P Global Market Intelligence.

South Korea's Hana Financial Group Inc. was the only bank outside mainland China to log a decline in its common equity Tier 1 (CET1) ratio, the sample showed. The data covered Asia-Pacific banks that report CET1 ratios and had assets greater than $100 billion as of June 30.

Mainland Chinese banks have increased lending to support the government's economic efforts, contributing to a decline in their capital. Other factors include write-offs of bad loans, particularly in the distressed property sector, and slowing earnings due to declines in net interest margins. Credit growth in mainland China slowed in September following a surge in the previous month, and S&P Global Ratings predicts that the world's second-largest economy would fall short of its target GDP growth of about 5% in 2023.

But there may be improvements in mainland Chinese banks' CET1 ratios in the coming quarters, according to Iris Tan, senior equity analyst at Morningstar. "We expect [the] macro economy to recover in 2024, thus we expect improved profitability and net profit growths to around 4%-5%" for state-owned banks in 2024, Tan said. Growth in the risk-weighted assets of mainland Chinese banks are also likely to decline as demand for retail loans recovers, Tan noted.

Seventeen banks from mainland China posted gains in their CET1 ratios in the second quarter, according to Market Intelligence data.

In the quarter ended June, Japan's Shizuoka Financial Group Inc. stood out as the top performer, raising its CET1 ratio by 333 basis points year over year to 18.78%, Market Intelligence data showed.

Thailand's Kasikornbank PCL achieved a CET1 ratio of 16.06%, the second-highest in the region, representing a 68-bps increase compared to the previous year. It was followed by Singapore-based Oversea-Chinese Banking Corp. Ltd., which reported a CET1 ratio of 15.44%.

During the quarter, four mainland Chinese banks, including two megabanks, posted declines of more than 50 bps in their CET1 ratios. Shengjing Bank Co. Ltd. saw the sharpest drop of 110 bps to 9.19%, and Beijing Rural Commercial Bank Co. Ltd. decreased 72 bps to 11.53%. Agricultural Bank experienced a decline of 71 bps to 10.40%, and China Construction Bank's CET1 ratio fell 66 bps to 12.75%, the data showed.