Chinese banks see Q1 leverage ratios slide as lending surges

Many major mainland Chinese banks saw declines in their leverage ratios in the quarter ending March 31, as they accelerated lending to support government growth targets and reported weaker returns on equity.

Twenty of the 26 mainland Chinese banks with more than $100 billion in assets posted lower Basel III leverage ratios, led by Bank of Beijing Co. Ltd. with a 67-basis-point decline, according to S&P Global Market Intelligence data. Agricultural Bank of China Ltd., one of the country's largest banks, saw its ratio drop 62 basis points (bps) to 7.05%. Bank of Changsha Co. Ltd.'s ratio fell 54 bps, while Bank of Chongqing Co. Ltd.'s declined 49 bps.

"The leverage ratios of most Chinese banks decreased in the first quarter because of strong loan growth in the quarter, partially due to the banks front-loading loans; a weak [return on equity] (or earnings growth) due to a decline in net interest margin and sluggish growth in fee income; and no capital raising activities," said Nomura's Shengbo Tang, head of Hong Kong and China financials research for Asia excluding Japan.

A bank's leverage ratio measures its common equity Tier 1 capital and additional Tier 1 capital as a percentage of total leverage exposure. A high leverage ratio indicates that a bank has more capital reserves and is better positioned to weather financial crises, but also means that it has less money to lend out.

Mainland Chinese banks have been expanding their loan portfolios as they seek to support the government's 5% economic growth target in 2023. Banks added 10.6 trillion yuan of new loans in the quarter, up by 2.270 trillion yuan year over year, according to April data from the People's Bank of China. However, loan growth appears to have slowed since, as banks extended 718.80 billion yuan of new loans in April, down from 3.890 trillion yuan in March, the central bank said in May.

In addition, mainland Chinese banks have faced declining returns on average equity (ROAE). Agricultural Bank of China's ROAE, for instance, fell to 10.67% as of March 31 from 11.40% a year earlier, while Industrial and Commercial Bank of China Ltd.'s ROAE declined to 10.21% from 11% in the same quarter last year, according to Market Intelligence data.

Not all mainland Chinese lenders recorded year-over-year declines in their leverage ratios in the first quarter. Bank of Nanjing Co. Ltd.'s leverage ratio rose 61 bps, the highest increase among banks in Asia-Pacific, to 6.14%.

"Some Chinese banks' leverage ratios increased slightly, mainly due to their slower asset growth," said Nomura's Tang.

Looking ahead, Tang said the rest of the year could differ from the first quarter for most Chinese banks, given their improving earnings outlook and slowing loan growth.

Meanwhile, Indian banks reported some of the highest leverage ratios in the region, though their leverage ratios decreased year over year. HDFC Bank Ltd. had the second-highest leverage ratio in the region at 10.25%, 57 bps lower than a year ago. ICICI Bank Ltd.'s ratio rose 17 bps to 10.15% in the first quarter, ranking it third in the region. Axis Bank Ltd.'s ratio dropped 55 bps to 8.35%.

"The change in leverage ratios are not very significant for Indian banks; so we don't see that as impacting the credit profile of any bank materially," said Krishnan Sitaraman, senior director and deputy chief ratings officer at CRISIL Ratings. "Wherever credit growth has been significant, necessitating higher deposit mobilization without a proportionate increase in accruals, leverage levels go up."

Sitaraman expects Indian banks to see some increase in leverage ratios in the current fiscal year, given expectations of credit growth at similar levels to the last fiscal year.

"But again, we don't expect any material changes," Sitaraman said. "At the same time, banks which will go in for a capital raise will see their leverage levels coming down."