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S&P: Chinese banks may face 1.6 trillion yuan extra credit costs due to COVID-19

The economic shock created by the coronavirus pandemic could increase credit costs for Chinese banks by nearly 1.6 trillion yuan in 2020, S&P Global Ratings said.

The new estimate is more than half of S&P's pre-COVID-19 projection of sector net profits for 2020, and incorporates a 150% provision cover to the incremental nonperforming loans, a 5% provision cover to incremental special-mention loans and loans earmarked but kept in the normal classification. The impact could be less if banks chose to cut their loan-loss provision buffers, it said.

S&P expects the official reported nonperforming loan ratio for China's banking sector to be about 2.2% for 2020, up from an estimated 1.74% at 2019-end mainly due to loan forbearance and direct fiscal and monetary measures. While loan forbearance – such as payment holidays, reduced interest charges and extended maturities – facilitates financial stability, the credit cost to the banking system could build up over time if the recovery is slower or less than expected, it added.

The Chinese banking sector's nonperforming assets could rise about 2 percentage points to 7.25% in 2020, compared to a pre-outbreak estimate of 5.23%. The projection is based on an assumption that 50% of forborne loans affected by the outbreak are nonperforming assets.

S&P said China's high regulatory requirements have made several banks in the country to accumulate significant provisions, which, if lowered, could help them absorb the additional credit costs. However, the agency added that if disruptions related to the outbreak are prolonged, the likelihood of recovering delayed payments will diminish and credit costs will rise further.

As of April 8, US$1 was equivalent to 7.06 Chinese yuan.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.