Decline in mainland Chinese banks' Q4 CET1 ratios erodes buffers

Almost half of major mainland Chinese banks reported declines in their Basel III common equity Tier 1 (CET1) ratios in the three months ended Dec. 31, 2023, further eroding their capital cushions.

Ten of the 21 mainland Chinese banks in a sample of 45 Asia-Pacific lenders reported year-over-year declines — ranging from 5 basis points to 54 basis points — in their CET1 ratios in the last quarter of 2023, according to data compiled by S&P Global Market Intelligence. Among those 10 lenders were the country's four largest banks by assets: Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd.

China Construction Bank's CET1 ratio dropped 54 basis points — the steepest decline in the sample — to 13.15% as of Dec. 31, 2023, but it was well above the minimum regulatory capital requirement of 9%, the data shows.

The world's second-largest economy has set an economic growth target of around 5% in 2024 and announced measures to support sectors such as real estate, including asking banks to lend more. Authorities implemented other measures, including interest rate cuts, which put pressure on banks' net interest margins (NIMs) and profitability. Consequently, major mainland Chinese commercial banks' aggregate NIM dropped to a record low of 1.69% in the fourth quarter of 2023 from 1.74% in the first quarter, according to data from the National Financial Regulatory Administration.

The sample covered banks headquartered in Asia-Pacific with assets greater than $300 billion as of Dec. 31, 2023. In total, 13 Asia-Pacific banks reported declines in their CET1 ratios in the quarter, while 32 posted increases, indicating that banks in the region maintain healthy cushions above the regulatory minimum.

Rest of Asia-Pacific

Major Japanese and South Korean banks are among the most cushioned lenders in the region in terms of capital buffers, with CET1 ratios exceeding regulatory requirements, Market Intelligence data shows.

Japan-based Nomura Holdings Inc.'s CET1 ratio was more than double the regulatory mandate at 16.32% as of the end of December 2023, while The Norinchukin Bank registered the largest year-over-year increase — 462 basis points — in its ratio. The Japanese bank's CET1 ratio of 18.25% was the highest among large banks in Asia-Pacific.

The Bank of Japan ended its negative interest rates policy in March, raising expectations of further rate hikes this year. Higher rates are likely to boost banks' net interest margins by widening the gap between lending rates and borrowing costs, helping them to further improve their capital buffers.

All six South Korean lenders in the sample logged year-over-year increases in their CET1 ratios in the fourth quarter of 2023, led by Woori Financial Group Inc. and Shinhan Financial Group Co. Ltd. with respective increases of 41 and 38 basis points. KB Financial Group Inc. had the highest CET1 ratio at 13.59% among the South Korean banks in the sample, followed by Hana Financial Group Inc. at 13.22%.