Chinese banks' capital buffers may erode further on weak market sentiment

Chinese banks are likely to see further erosion in their capital cushions above regulatory minimum requirements after the quarter ended Sept. 30, as market sentiment remains weak and the country's property market has yet to fully recover.

Chinese banks were some of the least cushioned in the Asia-Pacific region in terms of capital buffers, as measured by common equity Tier 1 (CET1) ratio in excess of minimum regulatory requirements, according to an analysis of data by S&P Global Market Intelligence. The analysis covered banks headquartered in the Asia-Pacific region with total assets greater than $300 billion as of Sept. 30. In total, CET1 ratios of 12 of the 20 Chinese banks in the analysis fell year over year. Despite the declines, CET1 ratios of all the Chinese banks remained above the minimum regulatory requirement, the data show.

"The deteriorating CET-1 ratios of medium-sized Chinese banks were due to falling [return on equity] as these mid-sized banks were more negatively affected by slowing economy and growing property risks (they are more exposed to consumer credits and property lending)," said Iris Tan, senior equity analyst at Morningstar, a US-headquartered financial services firm.

"This trend should continue in 2024 as consumer/capital market sentiment remains weak, and property sales have yet to see recovery," Tan added.

While China is likely to meet its 2023 growth target of about 5%, the lingering housing market downturn, which has pressurized banks' lending and asset quality and poses risks to their capital positions, remains in focus. Besides increasing lending to different sectors to support the government's economic growth target, write-offs of bad loans — particularly in the distressed property sector — and earnings slowdown also contributed to the decline in the banks' capital ratios.

*Click here to download a spreadsheet with data featured in this story. *Click here to read our recent story on how major Australian banks face declining net interest margins and intense competition for deposits in 2024.

Gainers and losers

China's four largest banks by assets — Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Agricultural Bank of China Ltd. and Bank of China Ltd. — saw their capital ratios erode in the quarter versus a year ago, with declines of between 22 percentage points and 95 percentage points in their CET1 ratios. China Zheshang Bank Co. Ltd.'s ratio clocked in at 8.28%, just 0.78 percentage points above the required 7.50%.

Officially, data from China's National Administration of Financial Regulation showed that large commercial banks in the country held an aggregate capital adequacy ratio, in which CET1 is a main component, of 17.10% as of Sept. 30, an increase of 21 basis points from the previous quarter, while that of rural commercial banks — usually much smaller in size and riskier — was 12.07%, representing an increase of 12 basis points.

India's HDFC Bank Ltd., Japan's Sumitomo Mitsui Financial Group Inc. and Singapore's Oversea-Chinese Banking Corp. Ltd. maintained the largest capital buffers above minimum regulatory requirements in the third quarter, Market Intelligence data shows. As of Sept. 30, HDFC Bank's CET1 ratio rose to 17.15% from 15.12% as of Sept. 30, 2022, representing a capital buffer of 8.95% above the minimum required 8.20%.

In addition to HDFC, just five other major banks in the region improved their CET1 ratios by more than 1 percentage point: Norinchukin Bank, KB Financial Group Inc., ANZ Group Holdings, Westpac Banking and Woori Financial Group, the data shows. Norinchukin Bank's CET1 ratio rose 1.43 percentage points to 14.03% from 12.60% a year ago. Woori's CET1 ratio rose 1.19 percentage points to 12.10%, while each of KB Financial and Westpac logged increases of 1.09 percentage points. ANZ Group Holdings' ratio clocked in at 13.34% as of Sept. 30, up 1.05 percentage points from a year ago.