Midsized mainland Chinese banks improve liquidity positions as loan growth falls

Liquidity positions at midsized banks in mainland China improved in the 12 months ended June 30, as loan growth declined due to weak borrowing demand.

Zhongyuan Bank Co. Ltd. topped a ranking of Asia-Pacific banks with the highest liquidity coverage ratios (LCRs), posting a ratio of 589.17% as of June 30, according to an S&P Global Market Intelligence analysis of the region's banks with assets over $100 billion. Bank of Jilin Co. Ltd., another mainland Chinese bank, ranked second with a ratio of 379.86%, while Bank of Chongqing Co. Ltd. secured the third spot after its ratio rose 93 percentage points to 348%.

"There is very little demand for loans from small banks for two reasons," said Alicia Garcia Herrero, chief economist at Natixis CIB for Asia-Pacific. "Many were very exposed to real estate and there is no demand from developers to borrow. They also lend to [small and medium-sized enterprises] but we cannot forget that 30% of Chinese companies are loss-making now, especially SMEs, so small banks are being careful."

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.

Loan growth drops

Loan growth at mainland Chinese banks has slowed despite the central bank's easing measures to support the country's 2024 GDP growth target of 5.0%. The People's Bank of China on Sept. 24 reduced its benchmark interest rate and reserve requirement ratio for banks, among other measures, to support the economy. In July, the central bank cut the five-year loan prime rate — considered the benchmark for mortgages — to a record low of 3.85%.

Growth in the total assets of China's banking system decelerated to 6.6% in June from 10.5% a year ago, marking the slowest loan growth since December 2018, according to the National Financial Regulatory Administration (NFRA). It increased to 7% in July.

Midsized banks in mainland China also reported the biggest improvements in their ratios in the year to June 30. Occupying four of the top five spots were Bank of Chongqing, Bank of Chengdu Co. Ltd., Bank of Changsha Co. Ltd. and Bank of Ningbo Co. Ltd. Hong Kong-based The Bank of East Asia Ltd. ranked third, with a year-over-year improvement of 62 percentage points in its LCR.

On the contrary, mainland China's four largest banks by assets maintained relatively conservative liquidity positions, reflecting their ability to lend to big corporates.

Industrial and Commercial Bank of China Ltd.'s LCR increased by 10 percentage points to 133.65% as of June 30 and Bank of China Ltd.'s ratio rose 7 percentage points to 138.14%. In contrast, China Construction Bank Corp.'s LCR fell 22 percentage points year over year to 125.43% and Agricultural Bank of China Ltd.'s ratio declined 6 percentage points to 120.27%.

"Large banks can lend more since they lend to big companies, which explains why their LCRs are lower," Herrero said.

At the end of June, the aggregate LCR of mainland China commercial banks was 150.7%, 17 basis points lower than a year ago, according to the NFRA.

Elsewhere in the region

South Korean lenders recorded some of the lowest LCRs among Asia-Pacific banks in the sample.

Six of seven banks with the lowest ratios were based in South Korea, with Woori Bank sitting at the bottom of the table with a ratio of 101.17%. Other South Korean banks in the sample were NongHyup Bank, Industrial Bank of Korea, KB Kookmin Bank, Shinhan Bank and Hana Bank Co. Ltd.

In May, South Korea's Financial Services Commission announced plans to raise banks' LCR requirement to 97.5% from 95% for the second half of 2024. The LCR requirement was eased in April 2020 due to the COVID-19 pandemic. The regulator said authorities must review market conditions in the fourth quarter to decide further plans from January 2025 onward.

The Norinchukin Bank logged the highest LCR among Japanese lenders at 183.70%, even after its ratio fell 24 percentage points, while Concordia Financial Group Ltd. had a 127.70% LCR. Indian lender Canara Bank's 146.54% ratio was the highest among domestic peers, while Bank of India Ltd. had the lowest of 120.05%.