Leverage ratios rise at Indian banks in Q3 as Chinese lenders see declines

India's largest banks improved their Basel III leverage ratios in the quarter ended Sept. 30, while the ratios of most Chinese lenders declined.

Eight of the nine biggest banks in India posted year-over-year increases in their leverage ratios in the third quarter. Meanwhile, 16 out of 25 of the largest banks in mainland China reported year-over-year declines in their leverage ratios, an extension of a trend observed in the previous quarter, according to S&P Global Market Intelligence data. The ranking looked at lenders with assets of more than $100 billion as of Sept. 30.

The leverage ratio is a measure of banks' common equity Tier 1 capital and additional Tier 1 capital as a percentage of total leverage exposure. A lower leverage ratio indicates a bank has fewer capital reserves and is potentially less prepared to weather financial crises, but it could also mean the bank has been lending at a faster rate.

Indian banks perform well

Almost all Indian banks in the ranking reported year-over-year increases in their leverage ratios, across both the public and private sectors. Punjab National Bank reported the greatest increase in Asia-Pacific in the quarter, with its ratio rising 87 basis points year-over-year. HDFC Bank Ltd., meanwhile, posted a 82-basis-point increase and Bank of Baroda Ltd. clocked an increase of 61 basis points.

The capital positions of Indian banks have expanded on the back of increasing profits and strong economic growth. This could well continue, with S&P Global Ratings estimating loan growth of 15% for Indian banks in 2023, dipping slightly to 12% in both 2024 and 2025.

The top-tier private sector banks remain well capitalized, while public sector banks have also raised ample capital in the form of equity and additional Tier 1 instruments to strengthen their capital ratios above the minimum regulatory requirement, according to Deepali V. Seth Chhabria, an analyst with S&P Global Ratings. Indian financial institutions, especially the public-sector banks, are expected to sustain their improvement in capital positions.

– Click here to download a spreadsheet with the Basel III leverage ratios of the largest Asia-Pacific banks. – Read more about Chinese banks' capital buffers.

Slowdown in China

Most Chinese lenders, on the other hand, saw their leverage ratios decline. Bank of Beijing Co. Ltd. clocked the largest year-over-year decline, with the ratio falling 72 basis points. This was followed by Industrial and Commercial Bank of China Ltd. and Agricultural Bank of China Ltd., which both posted a decline of 41 basis points.

Increased credit risks due to weakening consumer and business confidence could further impact Chinese banks' loan portfolios and earnings buffers, according to S&P Global Ratings, which projects overall loan growth to fall to 10.2% in 2024 from 11.6% in 2023.

Chinese banks have stepped up lending to support the economy, including more higher-risk-weighted corporate loans, according to Iris Tan, senior equity analyst at Morningstar. At the same time, their return on equity has weakened due to revenue contraction and higher operating costs, Tan said, adding that the implementation of new rules in China will likely boost large banks' capital ratios.

China's National Administration of Financial Regulation on Nov. 1 published the final version of its Capital Management Rules for Commercial Banks, which will come into effect Jan. 1, 2024. The new rules are an effort to bring the country’s banking system further in line with the latest international standards on capital requirements set by the Basel Committee on Banking Supervision.

Chinese banks' balance sheet growth outpacing capital accumulation contributed to the decline in leverage ratio, according to Ming Tan, an analyst at S&P Global Ratings. The trend of declines in Chinese banks' leverage ratio could continue in the near term, though the magnitude of decline could moderate. Tan added that loan growth could moderate as the economy regains its footing.

Some Chinese banks also posted strong increases in their leverage ratios, with Bank of Nanjing Co. Ltd. securing a 78-basis-point jump in its ratio compared to the previous year.

China's GDP grew 4.9% in the July-September year over year, even as banks grapple with the fallout of a slowdown in the Chinese economy and growing property risks. Chinese banks extended 2.31 trillion yuan of new domestic currency loans in September, compared with 2.47 trillion yuan in the same month a year earlier, according to data from the People's Bank of China.