Chinese banks lead regional peers as liquidity ratios tick upward

Large banks in mainland China are better positioned than their Asia-Pacific peers to pay their short-term debt after most improved their liquidity in the past year.

In a ranking of the region's banks with highest liquidity coverage ratios (LCRs) at the end of 2023, the top seven were from mainland China, S&P Global Market Intelligence data shows. Of those seven, just one showed an annual LCR decline.

LCR, calculated by dividing liquid assets by short-term debts, measures a bank's ability to meet its current debt obligations without raising external capital.

Zhongyuan Bank Co. Ltd., in the central Chinese province of Henan, topped the table. The lender, with assets of $189.88 billion, had an LCR of 437.67%, up 94 percentage points from a year ago, the data showed. It was followed by Chongqing Rural Commercial Bank Co. Ltd. with an LCR of 414.05% — this 117 percentage-point surge was the biggest jump among regional peers. State-owned Postal Savings Bank of China Co. Ltd. ranked third on the list, with the lender's LCR up 53 percentage points year over year to 303.61%. With assets of $2.218 trillion, Postal Savings Bank is among the six biggest state-owned lenders in mainland China.

Mainland China banks are "getting conservative in maintaining more liquid assets," Iris Tan, senior equity analyst at Morningstar, told Market Intelligence via email. "Besides, [mainland] Chinese banks tend to have higher LCRs than APAC peers, given the high proportion of government bond investment and better duration match of assets liabilities," Iris Tan said.

LCR boost

A dozen of the mainland China lenders did, however, see declines in their LCRs. This, said Morningstar's Tan, was due to a "different asset and liability mix."

The data assessed 65 banks in Asia-Pacific covered by Market Intelligence and with assets of more than $100 billion. Eight mainland China banks made the top 10, with 28 of the country's lenders making the list — more than any other country or territory in the region.

Many Chinese banks have stepped up their asset allocation to investments, thus boosting their LCRs. The five banks with the most-improved liquidity in the past year were from mainland China, the Market Intelligence data shows.

Mainland China banks have also been helped as authorities have taken steps to help the property market rebound from a downturn triggered by oversupply and reduced demand after the COVID-19 pandemic. The government announced a new set of measures, such as relaxed norms for loans for residential property, to boost demand. Additionally, monetary policy has stayed accommodative since the pandemic, and the People's Bank of China cut the five-year loan prime rate, generally seen as the benchmark for mortgages, to a record low of 3.95% in February.

Aggregate assets of Chinese commercial banks grew between 10.5% and 11.7% in 2023, according to the National Financial Regulatory Administration, while liabilities grew between 10.7% and 12.1%.

Lower liquidity cover

Guangzhou Rural Commercial Bank Co. Ltd. had the biggest LCR decline of 192 percentage points to 227.08, the data showed. Ping An Bank Co. Ltd. had the lowest LCR among banks based in mainland China, at 112.34%.

"The LCR for individual banks depends on its customer profile and risk management strategy," Ming Tan, director at S&P Global Ratings, told Market Intelligence via email. "Generally, effective loan demand was weak, save for a few sectors encouraged by the authorities, leading to greater asset allocation in investments like government bonds," Ming Tan said.

The mixed trends "could continue in 2024 until household and business confidence improves," Ming Tan said, adding, "we saw households accumulating more deposits and borrowing less while the reverse happened for corporates in 2023."

All five of the bottom five banks on the list were from South Korea, with one other lender from the country making the league table in 11th-from-bottom spot. South Korea's Shinhan Bank, Woori Bank and Hana Bank Co. Ltd. had LCRs barely above 100%, putting them at the bottom of the ranking.

Japanese banks showed a mixed trend. LCR at The Norinchukin Bank dropped 30 percentage points year over year to 192.50%, while Sumitomo Mitsui Trust Holdings Inc. posted an increase of 17 percentage points to 165.30% and Mitsubishi UFJ Financial Group Inc. a gain of 9 percentage points to 161.80%, the data shows.

In India, Bank of India Ltd. posted a 40 percentage-point decline in its LCR to 148.08%, while by Canara Bank had an increase of 14 percentage points to 135.78%.