China Banking Monitor - 2021 February 09, 2022 - BBVA Research
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China Banking Monitor 2021 February 09, 2022
Index 01 Macroeconomic environment 02 Banks’ performance amid the regulatory tightening 03 Banks interconnectedness with shadow banking systems
China banking monitor 3
Main takeaways
Aggregate credit growth Meanwhile, bank assets Asset risk remained high
slowed in 2021 due to the growth slowed mainly due to amid the repeated
prudent monetary policy sluggish non-loan assets pandemic threats and the
stance through the most expansion, reflecting banks’ slow recovery. However,
time of the year. Recently, efforts to rein in their shadow the NPL ratio declined as
the policy stance has banking activities ahead of banks sped up the
become more pro-growth. full implementation of new disposal of bad loans.
asset management rules.
Banks’ net profit was Capital adequacy ratio Banks’ liquidity Banks
supported by both low remained stable thanks remained adequate. interconnected
funding cost and low to both healthy profit The risks associated ness with the
base effect. growth and lower pace with Evergrande’s shadow
Meanwhile, the net of risk-weighted assets fallout are still banking system
profit was also expansion. Small manageable continues to
underpinned by the lenders are still subject although it will take diminish.
reduction of to capital shortfalls. a longer time for the
impairment provisions. banking sector to
absorb the shock.01 Macroeconomic environment Weaker-than-expected credit growth in 2021 due to the government’s prudent monetary policy
China banking monitor 5
Economic growth momentum slowed after a strong rebound in the
first half of 2021
GROWTH SLOWED TO 4.0% IN Q4 FROM 4.9% IN WEAK INFRASTRUCTURE AND REAL ESTATE
Q3, CONCLUDING 2021 GDP AT 8.1% FAI STILL WEIGHED DOWN ON FAI
% ytd
20 40
15 30
20
10
10
5 0
0 -10
-20
-5
-30
-10
-40
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Dec-21
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Feb-19
Feb-20
Apr-19
Apr-20
Feb-21
Apr-21
Oct-18
Oct-19
Oct-20
Oct-21
Dec-18
Dec-19
Dec-20
Dec-21
Aug-19
Aug-20
Jun-19
Jun-20
Jun-21
Aug-21
Final Consumption Expenditure
Gross Capital Formation FAI:Manufacturing Aggregate FAI
Net Export of Goods and Service FAI:Infrastructure FAI:Real estate
GDP growth
Source: CEIC & BBVA Research Source: CEIC, Haver & BBVA Research
The economic growth slowed to 4.0% y/y in Q4 from 4.9% y/y in Q3, concluding 2021 GDP at 8.1%, amid a
number of headwinds including weak consumer demand, intermittent COVID-related mobility restrictions, power
crunch, supply chain backlogs and a slowdown in property market.China banking monitor 6
China’s stock market corrected in 2021
CHINESE STOCK MARKETS DROPED AMID THE
RISK AVERSION SENTIMENT AS WELL AS CSI 300 INDEX AND FTSE CHINA A600
BANKS INDEX
RMB bn
2000.0 10000 20000
3900
1800.0
9000 18000
1600.0 3700
1400.0 8000 16000
3500
1200.0 7000 14000
3300
1000.0
6000 12000
800.0 3100
600.0 5000 10000
2900
400.0 4000 8000
2700
200.0
3000 6000
0.0 2500
Mar-20
Mar-19
Mar-21
Dec-19
Dec-20
Dec-21
Jun-19
Sep-19
Jun-20
Sep-20
Jun-21
Sep-21
2000 4000
Apr-20
Apr-21
Oct-21
Feb-20
Oct-20
Feb-21
Dec-19
Aug-20
Dec-20
Aug-21
Dec-21
Jun-20
Jun-21
Daily balance of margin lending (LHS)
Shanghai Composite Index (RHS)
CSI 300 Index FTSE China A 600 Banks Index
Source: Wind & BBVA Research Source: Wind & BBVA Research
China’s mid-year regulatory storm, which targeted several sectors coupled with the common prosperity initiatives
and the fallout of Evergrande have deteriorated the market sentiment, leading to a major sell-off in the equity
market. Both the Shanghai Composite Index and the CSI 300 Index dropped amid the risk averse sentiment.China banking monitor 7
Monetary policy stance remained prudent in the first three
quarters of 2021 and then turned pro-growth in Q4
THE CENTRAL BANK HAS CUT RRR 2 TIMES INTEREST RATES HAS BEEN TRENDING DOWN
SINCE JULY FOLLOWING THE RECENT SUPPORTIVE
MONETARY POLICY
% %
24 7
22 6
20 5
18
4
16
3
14
2
12
1
10
8 0
Mar-18
Mar-19
Mar-20
Mar-21
Dec-18
Dec-21
Jun-17
Sep-17
Dec-17
Jun-18
Sep-18
Jun-19
Sep-19
Dec-19
Jun-20
Sep-20
Dec-20
Jun-21
Sep-21
6
Jul-15 Jun-16 May-17 Apr-18 Mar-19 Feb-20 Jan-21 Dec-21
Required Reserve Ratio: Large Depository Institution Treasury Bond Yield: Interbank: Spot Yield: 10 year
Shanghai Interbank Offered Rate (SHIBOR): 3 Month
Required Reserve Ratio: Small and Medium Depository Institution
Interbank Repo Fixing Rate: NIBFC: 7 Days
Source: Haver & BBVA Research Source: CEIC & BBVA Research
The central bank had implemented a cautious but supportive monetary policy through the most time of 2021 in a
bid to rein in the property market. After the fallout of Evergrande, the government cut required reserve ratio
(RRR) and lowered key benchmark lending rate, ushering in a new easing cycle of monetary policy for the soft
landing of the property sector and the entire economy.China banking monitor 8
Credit growth decelerated in 2021
ALL CREDIT, INCLUDING BANK LOANS, M2 GROWTH IS ANTICIPATED TO PICK UP AMID
BONDS AND SHADOW BANKING HAVE SLID AN EASING MONETARY POLICY IN 2022
RMB trn % yoy
6 18 45
5 40
16
4 35
3 14
30
2 12
25
1 10 20
0
-1 8 15
-2 6 10
Apr-20
Apr-21
Oct-19
Feb-20
Oct-20
Feb-21
Oct-21
Aug-19
Dec-19
Aug-20
Dec-20
Aug-21
Dec-21
Jun-20
Jun-21
5
0
Other Non-finan. enterprise equity -5
Net corporate bond Bank acceptance
Jul-04
May-06
Apr-07
Mar-08
Jul-15
May-17
Apr-18
Mar-19
Feb-09
Oct-12
Feb-20
Jun-05
Jan-10
Dec-10
Nov-11
Sep-13
Aug-14
Jun-16
Jan-21
Dec-21
Trust loan Entrusted loan
New loan (FX) New loan (RMB)
Bank credit growth (RHS)
Money Supply M1 Money Supply M2
Source: CEIC & BBVA Research Source: Wind & BBVA Research
Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy,
declined to 10.3% in 2021 from 13.3% a year ago. All forms of credits, including bank loans, bonds and shadow
credit, have slid from their peaks last year. The monetary policy is likely to become more supportive to prevent
growth hard-landing in 2022.China banking monitor 9
Declining macro-leverage ratio creates room for future monetary
policies
COMPOSITION OF CHINA’S MACRO LEVERAGE
As % of GDP
300
250
200
150
100
50
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
General Government Households Corporate debt Leverage ratio
Source: CEIC & BBVA Research
China’s macro leverage ratio, defined as total debt as % of GDP, stood at 272.5% at end-2021, 7.7% points lower
than the level recorded at end-2020.The falling macro leverage ratio was attributed to a stable overall debt level
and accelerated GDP growth last year. The continuous decline in the macro leverage ratio provide the policy room
to increase credit support to counter the growth headwinds.02 Performance of banking Sector Banks asset risk remained high although profit growth and capital adequacy are still healthy.
China banking monitor 11
A snapshot of financial fundamentals of Chinese banks
2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3
Asset quality and credit risk
Loans/total assets 52.7% 52.8% 53.0% 53.4% 53.7% 54.0% 54.7% 55.2% 55.8%
NPL ratio 1.86% 1.86% 1.91% 1.94% 1.96% 1.84% 1.80% 1.76% 1.75%
(NPL+special-mention loan) ratio 4.84% 4.77% 4.88% 4.69% 4.62% 4.41% 4.22% 4.12% 4.08%
Provisions/NPLs 187.6% 186.1% 183.2% 182.4% 179.9% 184.5% 187.1% 193.2% 197.0%
Profitability & efficiency
NIM 2.19% 2.20% 2.10% 2.09% 2.09% 2.10% 2.07% 2.06% 2.07%
Cost to income ratio 28.6% 31.7% 25.7% 26.9% 28.1% 31.2% 27.1% 28.1% 29.0%
ROE 12.6% 11.0% 12.1% 10.4% 10.1% 9.5% 11.3% 10.4% 10.1%
ROA 0.97% 0.87% 0.98% 0.83% 0.80% 0.77% 0.91% 0.83% 0.82%
Solvency
Tier 1 ratio 11.8% 11.0% 11.9% 11.6% 11.7% 12.0% 11.9% 11.9% 12.1%
Core Tier 1 10.9% 10.9% 10.9% 10.5% 10.4% 10.7% 10.6% 10.5% 10.7%
Leverage ratio 6.8% 6.9% 6.9% 6.7% 6.7% 6.9% 6.9% 6.9% 7.0%
NPLs/ Capital 10.9% 10.9% 11.3% 11.9% 11.9% 11.0% 11.1% 10.9% 10.7%
Liquidity and funding
Deposits/Total assets 67.0% 66.5% 66.4% 67.1% 67.0% 68.3% 68.9% 69.4% 69.4%
Non-deposits funding (Central bank,
bonds, NCDs, ...) / Total assets 37.3% 37.8% 37.3% 36.8% 37.2% 37.7% 37.4% 37.6% 38.1%
Loan to deposit ratio 74.4% 75.4% 74.9% 74.6% 75.5% 76.8% 77.2% 78.1% 79.1%
Current assets/ Current liabilities 57.0% 58.5% 58.6% 58.2% 58.6% 58.4% 58.5% 57.6% 58.6%
Liquidity coverage ratio 137.3% 146.6% 151.5% 142.5% 138.7% 146.7% 141.8% 141.2% 142.0%
Source: CBRIC & BBVA ResearchChina banking monitor 12
Bank assets growth slowed ahead of the full implementation of
asset management rules targeting shadow banking activites
BANKING ASSETS DECELERATED ITS GROWTH LARGE AND SHAREHOLDING COMMERCIAL
RATE BANKS STILL DOMINATE
RMB trn %
400 350 100%
90%
350
300 80%
300 70%
250 60%
250
50%
200
40%
150 200
30%
100 20%
150
50 10%
0%
0 100
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 Q3
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 Q3
Banking assets Banking liabilities Others Rural Commercial Bank
Bank assets % of GDP Bank liability % of GDP City Commercial Bank Share Holding Commercial Bank
Large Commercial Bank
Source: CBIRC & BBVA Research Source: CBRIC & BBVA Research
China’s banking sector assets decelerated markedly to 7.7% in the third quarter of 2021 compared to 10.7%
in the previous year, reflecting bank’s attempts to rein in their shadow banking and interbank activities ahead
of the full implementation of the new asset management regulations staring from 2022.China banking monitor 13
Non-loan assets growth showed a marked slowdown
NON-LOAN ASSETS GROWTH SLOWDOWN LOAN GROWTH RATE SLOWED DUE TO
WEIGHED ON BANK ASSETS GROWTH THE UNWINDING OF EMERGENCY CREDIT
RMB trn
25%
350 25%
300 20% 20%
250 15%
15%
200
10% 10%
150
5% 5%
100
0% 0%
50
0 -5% -5%
Mar-20
Mar-19
Mar-21
Sep-18
Dec-18
Sep-19
Dec-19
Sep-20
Dec-20
Sep-21
Jun-19
Jun-20
Jun-21
-10%
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Mar-18
Mar-19
Mar-20
Mar-21
Dec-17
Dec-18
Dec-19
Dec-20
Jun-18
Jun-19
Jun-20
Jun-21
Other assets Loan
Loan growth rate (RHS) Other assets growth rate (RHS)
Loan growth rate Nominal GDP growth rate
Source: CEIC & BBVA Research Source: CEIC & BBVA Research
Non-loan assets declined to a new recent low of 3.5% in the third quarter as banks stepped up regulation on
shadow banking and interbank activity ahead of 2022. Meanwhile, loan growth also eased to 12.2% in the Q3 to
reflect the continued unwinding of emergency credit extended during the peak of the pandemic as well as banks
tightened credit to the property market under the government’s window guidance.China banking monitor 14
Both housing mortgage loans and corporate loans have
weighed on the loan growth rate
RMB trn
200
180
160
140
120
100
80
60
40
20
0
Mar-20
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-21
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Jun-10
Jun-17
Sep-10
Jun-11
Sep-11
Jun-12
Sep-12
Jun-13
Sep-13
Jun-14
Sep-14
Jun-15
Sep-15
Jun-16
Sep-16
Sep-17
Jun-18
Sep-18
Jun-19
Sep-19
Jun-20
Sep-20
Jun-21
Sep-21
Housing Mortgage Loan Consumer Loan (exclude housing mortgage loan) Corporate loan
Source: CEIC & BBVA Research
Housing mortgage loans growth dipped to just 7% in September 2021 compared with 14.4% in the last year as
the property sector was dragged down by the Evergrande fallout. Also, corporate loans decelerated to 12.1% in
the Q3 2021 from 12.7% in the previous year as the unwinding of the emergency credit.China banking monitor 15
Although bank’s exposure to housing sector has been on
the rise over time, the related risks are still manageable
RMB bn %
60,000 27
24
50,000
21
40,000 18
15
30,000
12
20,000 9
6
10,000
3
0 0
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Housing Mortgage loans Real Estate Development loans
Share of Real Estate Loans in Total Loans (RHS) Share of mortage loan as total loans
Source: CEIC & BBVA Research
China’s banking sector’s aggregate loans to property developers and mortgage loans amounted to RMB 12.2
trillion and RMB 39.2 trillion respectively as of the end of September, or 7.4% and 20.7% of bank’s total loans.
However, the risk of housing market slowdown on the banking sector seems to be limited due to a strict
requirement for minimum down payment of housing mortgage, most of time at 30% of the housing value.China banking monitor 16
Meanwhile, China’s household debt leverage is lower than
most Western countries
140
120
100
80
60
40
20
0
Household debt as % of GDP
Source: CEIC & BBVA Research
Despite a rapid rise in household debt as % of GDP since 2013, Chinese household debt as a share of GDP is
still low compared with other countries, with the ratio stood at 61.7% in 2020. In addition, more than half of
Chinese households’ financial assets are in cash and deposits, providing them with a buffer to household debts.China banking monitor 17
PBoC stress test results for 30 large and medium-sized
banks
SENSITIVITY STRESS TEST FOR KEY AREAS NUMBER FOR BANKS LIKELY TO FAIL*
(MOST SEVERE SHOCK)
16
14.39% 14
Before shock
14.10% 12
Bond default risk
14.09% 10
Credit risk of WMPs
12.92% 8
Investment loss risk
12.32% 6
Real estate loan risk
12.27% 4
Local government debt risk
11.50% 2
Interbank counterparty default risk
11.46% 0
Customer contentration risk 2022 2023
11.26% Mild stress test scenario Moderate stress test scenario
Business loan risk for SMEs
0% 2% 4% 6% 8% 10% 12% 14% 16% Severe stress test scenario
*The PBoC defines failing the stress test as core Tier 1 (T1) capital adequacy ratios
(CAR) falling below 7.5%, T1 CAR falling below 8.5% or total CAR falling below
10.5%.
Source: PBoC & BBVA Research Source: PBoC & BBVA Research
PBOC’ stress test showed in the condition that the NPL ratio of developer loans and mortgage loans rise by 15%
and 10% respectively, the banks’ capital adequacy ratio will drop to 12.32%, a 2.07% decline. Even under the
most severe shocks, banks capital adequacy ratio is still above the minimum requirement of 10.5%. However,
small banks still face significant capital pressure from economic slowdown and asset quality risks.China banking monitor 18
Green loan growth accelerated its rate
RMB Trn
16 12%
14
10%
12
8%
10
8 6%
6
4%
4
2%
2
0 0%
2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q3
Green loans (LHS) Share in total corporate loans (RHS)
Source: CEIC & BBVA Research
In response to the national priority of carbon neutrality initiative, banks are accelerating lending and investment in
green projects including renewable energies, electric vehicles and new infrastructure etc. Reflecting this shift,
green loan growth accelerated to 28% at end-Q3 2021 and is likely to accelerate further in the coming quarters.China banking monitor 19
Asset risks remain high despite lower NPL ratio
NPL RATIO MODERATED WHILE NPLS LEVEL …SPECIAL- MENTION LOAN RATIO ALSO
REMAINED HIGH DECLINED AS CONTINUOUS DISPOSAL OF BAD
LOANS
RMB bn % % %
3,000 3.0 5.0 300
4.5
2,500 2.5 250
4.0
3.5
200
2,000 2.0
3.0
2.5 150
1,500 1.5
2.0
100
1,000 1.0 1.5
1.0
50
500 0.5 0.5
0.0 0
Mar-20
Mar-21
Sep-19
Sep-20
Sep-21
0 0.0
Mar-14
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Substandard Loan Ratio Doubtful Loan Ratio
NPL (LHS) NPL Ratio (RHS) Loss Loan Ratio Special-mention Loan Ratio
Provision coverage ratio(RHS)
Source: CEIC & BBVA Research Source: CEIC & BBVA Research
The NPL ratio have declined steadily as the authorities have speeded up disposal of bad loans. The NPL ratio
eased to 1.75% in the Q3 2021 from 1.96% in the Q3 last year. Meanwhile, special-mention loan ratio fell to
2.33% from 2.66% as a strengthened effort in bad loan disposal capability. However, asset risks remain high
amid the repeated pandemic threats and the slowing recovery.China banking monitor 20
Loan quality diverged between big banks and regional
banks and this trend will continue in 2022
RURAL COMMERCIAL BANKS ARE VULNERABLE THE PROVISION COVERAGE RATIO FOR RURAL
TO FURTHER ASSET DETERIORATION COMMERCIAL BANKS IS UNDER THE
REGULATORY REQUIREMENT
4.5 %
400
4.0
350
3.5
300
3.0
250
2.5
200
2.0
1.5 150
1.0 100
0.5 50
0.0 0
May-20
May-16
May-17
May-18
May-19
May-21
Sep-15
Sep-16
Jan-16
Jan-17
Sep-17
Jan-18
Sep-18
Jan-19
Sep-19
Sep-21
Jan-20
Sep-20
Jan-21
2014 2015 2016 2017 2018 2019 2020 2021
Q3
Large Commercial Bank Commercial Bank Large commercial bank
Share Holding Commercial Bank
City Commercial Bank Share holding commercial bank City commercial bank
Rural Commercial Bank Rural commercial bank Foreign Bank
Foreign Bank
Overall Commercial Bank
Source: CEIC & BBVA Research Source: CEIC & BBVA Research
Rural and city commercial banks are still vulnerable to further asset quality deterioration given their less
diversified asset portfolios and higher exposure to weak borrowers. In particular, rural commercial banks
collectively have a provision coverage ratio of about 132%, reflecting its less capital buffer to withstand loan
losses as the ratio is below the regulatory requirements of at least 150%.China banking monitor 21
Banks’ profits were supported by lower funding costs
NET INTEREST MARGIN (NIM) BOTTOMING OUT THE PROPORTION OF LENDING RATE BELOW
OR AT LPR CONTINUES TO RISE
RMB bn % 100%
2,500 2.8 90%
2.7 80%
2,000
2.6 70%
60%
1,500 2.5
50%
2.4
40%
1,000 2.3 30%
2.2 20%
500
10%
2.1
0%
0 2.0
Above LPR: 0.5-1.5% Above LPR: 1.5-3%
Net Profit Net Interest Margin(RHS)
Above LPR: 0.5% Above LPR: 3-5%
Above LPR: over 5% Below or at LPR
Source: CBRIC & BBVA Research Source: CBRIC & BBVA Research
Banks net profit growth in Q3 2021 showed a year-on-year 11.4% increase compared with a -8.0% drop the same
quarter last year supported by improved bank performance and a reduction in provisions for impairments. Although
net interest margins (NIM) narrowed by 2.4 basis points in the same period from a year ago, lower funding costs
have offset weaker pre-provision profit.China banking monitor 22
Banks charged off less bad debts to smooth profit as the
economy rebounded from pandemic shock
BANKS’ BAD LOANS PROVISIONS MODERATED BANKS’ NET PROFIT GROWTH RATE IS WAY
SIGNIFICANTLY HIGHER THAN PRE-PROVISION PROFIT GROWTH
%
RMB bn 40
2,000
1,800 30
1,600
1,400 20
1,200
10
1,000
800
0
600
400 -10
200
0 -20
-30
May-19
Mar-18
May-18
Jul-18
Mar-19
Jul-19
Mar-20
May-20
Jul-20
Mar-21
May-21
Jul-21
Sep-18
Nov-18
Sep-19
Nov-19
Sep-20
Nov-20
Sep-21
Jan-20
Jan-19
Jan-21
Loan Write-off Loan Loss Provision
Net profit growth rate Pre-provision profit growth
Source: CBRIC & BBVA Research Source: CBRIC & BBVA Research
Banks’ provisions for bad loans have moderated remarkably compared with the same quarter last year as banks
charged off less bad debts to smooth profit, which reversed the previous pattern that government forced banks to
increase pro-cyclical loan loss previsions. Therefore, banks’ net profit growth rate is significantly higher than the
pre-provision profit growth,China banking monitor 23
ROA and ROE slightly improved
% %
22.0 1.5
1.4
20.0
1.3
18.0
1.2
16.0 1.1
14.0 1.0
0.9
12.0
0.8
10.0
0.7
8.0 0.6
Mar-18
Mar-19
Mar-20
Mar-21
Dec-17
Dec-18
Dec-19
Dec-20
Sep-17
Jun-18
Sep-18
Jun-19
Sep-19
Jun-20
Sep-20
Jun-21
Sep-21
ROE(LHS) ROA(RHS)
Source: CBRIC & BBVA Research
Both ROA and ROE improved slightly to 10.1% and 0.82% respectively from 10.0% and 0.8% respectively a year
ago supported by economic recovery in the first half of the year. These indicators for large and mid-tier banks
increased moderately as a higher reliance on market funding allowed them benefit from lower market interest rates,
while these ratios were largely flat for city and rural banks because of rising competition for deposits.China banking monitor 24
Banks’ capitalization remained stable, but needs more
capital to support its forthcoming credit spree
CORE TIER 1 CAPITAL ADEQUACY RATIO HAS AND CHINESE BANKS’ CAR STILL LAG BEHIND
DECLINED SIGNIFICANTLY THEIR MAJOR EMS PEERS
% %
15 0
26%
25%
14 0
13 19%
0 18% 18%
17% 17% 17%
12 New CAR requirement for SIBs: 11.5% 15% 15%
0 14%
12%
11
0
10 New CAR requirement for non-SIBs: 10.5%
0
9
0
8
Indonesia
Peru
Mexico
Brazil
Malaysia
Turkey
China
South Africa
Russia
India
Hungary
Argentina
Mar-19
Mar-17
Mar-18
Mar-20
Mar-21
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Sep-16
Dec-16
Sep-17
Dec-17
Sep-18
Dec-18
Sep-19
Dec-19
Sep-20
Dec-20
Sep-21
Core Tier 1 Capital Additional Tier 1 Capital Tier 2 Capital
Source: CBRIC & BBVA Research Source: CBRIC & BBVA Research
Bank capitalization remains stable, supported by steady profitability and slower risk-weighted asset
growth. The core tier 1 capital ratio picked up to 10.7% at the end of the third quarter, 3 basis points
higher than a year ago. In addition, additional tier 1 capital ratio rose 23 basis points in the period, driven
by large issuance of perpetual bonds.China banking monitor 25
A diverged capital buffer distribution among big and smaller banks
%
18
16
14
12
10
8
6
4
2
0
Total Large commercial bank Share Holding commercial City Commercial Bank Rural Commercial Bank
bank
9/2020 12/2020 3/2021 6/2021 9/2021
Source: CBRIC & BBVA Research
City and rural commercial banks have lower capital adequacy ratios as these banks are more sensitive
to interest rate margin and rely more on interest and investment income, which makes them less access
to capital and suffer higher asset risks.China banking monitor 26
Banks to replenish capital buffer amid enhanced regulation
CHINA’S DOMESTIC SYSTEMICALLY IMPORTANT BANKS NEED MORE
CAPITAL
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Min CET1 Ratio
Min CET1 Ratio
Min CET1 Ratio
Min CET1 Ratio
CMB
Huaxia
ICBC
Shanghai Pudong
ABC
BOC
Bank of Beijing
Industrial Bank
Postal Savings
Bk. Of Shanghai
Bcomm.
Everbright
CCB
Ping An
Ciic Bank
Bk. Of Jiangsu
Guangfa
Bank of Ningbo
Bucket 4 Bucket 3 Bucket 2 Minsheng Bucket 1
Source: Bloomberg & BBVA Research Source: CSRC & BBVA Research
China is stepping up efforts to protect the financial system by issuing its first list of 19 domestic systemically
important Banks (D-SIBs), with their capital were required to increased by 0.25% to 1%. We expect the pace of
perpetual bond and equity private placement will accelerate as they have the features of equity conversión or
write-down and could provide a funding channel for mid and lower tier banks.China banking monitor 27
China’s global systemically important
banks face TLAC shortfall
RELATIONSHIP BETWEEN TLAC AND BASEL III
Base III TLAC TLAC &Basel
framework framework III framework
Capital buffers Capital conservation, ,
3.5%-8.5% countercyclical and other
G-SIB bufferes -
Equal to or
greater than
33% of TLAC requirement
minimum
Minimun & Capital buffers
TLAC
capital requirement 19.5%- 26.5%
requirement Capital
8.0% Tier 1 adequacy
Core capital Ratio 8%
tier 1
capital Ratio
4.5% 6%
Basel Capital Requirements TLAC Requirenments TLAC Requirement&Capital Buffers
Capital conservation,countercyclical and other G-SIB buffers Unsecured,subordinated and other eligible debt
Tier 2 capital Additional tier 1 capital
Core tier 1 capital
Source: FSB & BBVA Research
The capital shortage major banks faced will be accelerated in the next few years to meet the TLAC rule,
which will be implemented at the start in 2025, with a higher requirement taking effect in 2028. It is expected
that the top 4 Chinese banks will need to raise RMB 3.8Tn in capital to meet the regulation needs.China banking monitor 28
Banks’ liquidity remained adequate
CHINA PBOC ACCELERATED OPEN MARKET FALLING EXCESS RESERVE INDICATES THAT
OPERATIONS IN THE SECOND HALF YEAR LIQUIDITY IN THE BANKING SYSTEM REMAIN
ADEQUATE
CNY bn
1500
% %
4.0 90
1000
3.5 80
500 3.0 70
60
2.5
0 50
2.0
40
-500 1.5
30
1.0 20
-1000
0.5 10
-1500 0.0 0
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Jun-21
Sep-15
Dec-15
Jun-16
Sep-16
Dec-16
Jun-17
Sep-17
Dec-17
Sep-19
Jun-18
Sep-18
Dec-18
Jun-19
Dec-19
Jun-20
Sep-20
Dec-20
Sep-21
Nov-21
Nov-21
Dec-21
Dec-21
Apr-21
Apr-21
Oct-21
Oct-21
Oct-21
Aug-21
Aug-21
Sep-21
Sep-21
Feb-21
Feb-21
Mar-21
Mar-21
Jul-21
Jul-21
May-21
May-21
May-21
Jan-21
Jun-21
Jun-21
Jan-22
Jan-22
Jan-21
Total Injection Total Withdrawal Net
Excess Reserve Ratio Loan-to-Deposit Ratio (RHS)
Source: Bloomberg & BBVA Research Source: CBRIC & BBVA Research
In contrast of the first half of 2021, the pace of net liquidity injection is accelerated given the slowing economic
growth. Excess reserve ratio remained low at 1.4% in the Q3, 20 basis points lower than a year ago, indicating
that liquidity in the banking system remain adequate after the PBOC cut the RRR and benchmark interest rate.China banking monitor 29
The failure of Huarong and Evergrande won’t cause systemic
risk to the financial system
YoY
Baoshang Bank Bank of Jinzhou The failuer of Evergrande fallout
declared liquidity injection Hengfeng bank Huarong
3.5
liquidation restructuring
3
2.5
2
1.5
1
02/07/2021
02/01/2022
02/05/2019
02/06/2019
02/07/2019
02/08/2019
02/09/2019
02/10/2019
02/11/2019
02/12/2019
02/01/2020
02/02/2020
02/03/2020
02/04/2020
02/05/2020
02/06/2020
02/07/2020
02/08/2020
02/09/2020
02/10/2020
02/11/2020
02/12/2020
02/01/2021
02/02/2021
02/03/2021
02/04/2021
02/05/2021
02/06/2021
02/08/2021
02/09/2021
02/10/2021
02/11/2021
02/12/2021
SHIBOR 7 days R007 7 days DR007 days NCDs 1 month
Source: Wind & BBVA Research
The potential weakness in the real estate market following the escalation of Evergrande’s financial distress posed
risk for China’s financial institutions. However, the amount of potential direct loss from the distress of Evergrande
is manageable in the context of Chinese large asset bases and loss-absorbing buffers in the financial system.China banking monitor 30
Small banks’ reliance on negotiable certificates of deposits
(NCDs) as funding source contracted markedly
BALANCE OF COMMERCIAL BANKS ISSUED NCDs
BY BANK TYPES
RMB billion %
3,000 5.0
4.5
2,500
4.0
3.5
2,000
3.0
1,500 2.5
2.0
1,000
1.5
1.0
500
0.5
0 0.0
State-owned commercial banks Joint-stock commercial banks City commercial banks Rural financial institutions
Q1 Q2 Q3 As % of bank assets (Q3)
Source: Shanghai Clearing House & BBVA Research
Banks’ reliance on interbank negotiable certificates of deposits (NCDs) has declined especially for rural
commercial banks, reflecting reduced need for NCD funding as recent monetary easing improves banks’ access
to interbank funds for refinancing. Thus, alleviating the concern that cross-holdings of bank securities among
financial intitutions will trigger contagion during market distress.China banking monitor 31
Banking sector 2022 Outlook
Despite a moderation in asset growth in 2021 as bank’s efforts to rein in
Asset growth their shadow banking and interbank activities, asset growth is likely to
rebound in 2022 driven by a pickup in loan growth in response to
regulators’ renewed call for more credit support to corporate borrowers.
Banks’ NPL ratios will likely increase moderately in 2022 as credit risks
Asset quality to some property developers increase. Large banks have built strong
loan loss reserves, while loan quality will continue to diverge. Some
smaller regional banks will still be under more pressure as they have
greater exposure to property-related businesses.
We expect banks’ net profit will be stable in 2022 supported by lower
Profitability NIMs as a new deposit pricing mechanism introduced by PBOC in
June 2021 will allow banks to cap deposit costs. However, in view of
the economic slowdown, banks are likely to accelerate their bad debt
disposal again.
Banks will replenish capital through perpetual bond and equity
Capitalization issuance since they need more capital to support its forthcoming
credit spree.
Shadow banking assets will retreat further in 2022 amid strict
Shadow banking regulatory supervision as authorities guard against the shadow
banking growth. Interconnectedness between banks and NBFIs is set
to decline further in 2022.03 Shadow banking activities Banks interconnectedness with the shadow banking system has further decreased
China banking monitor 33
Banks’ fund dependence of shadow banking
system has decreased moderately
BREAKDOWN OF BANKS LIABILITIES
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
19 Q3 19 Q4 20 Q1 20 Q2 20 Q3 20 Q4 21 Q1 21 Q2 21 Q3
Liabilities to Nonfin Inst/Households Liabilities to Central Bank NCDs
Oth Financial Corps(Except NCDs) Foreign Liabilities Bond Issue
Source: Haver & BBVA Research
Bank's reliance on nonbank financial institutions continued to decline in Q3,among which banks' liability to
other depository corporations dropped to RMB 11.1 trillion in Q3 2021 from RMB 11.5 trillion in the previous
quarter. This trend will likely continue in 2022 as regulators guard against the interconnectedness of banks.China banking monitor 34
China shadow banking assets were weighed by trust
loans and wealth management products
SHADOW BANKING ASSETS AS % OF GDP THE DECLINE OF SHADOW BANKING SECTOR IS
PICKED UP WEIGHED BY TRUST LOANS AND WELATH
MANAGEMENT PRODUCTS
RMB,tn As % of GDP
RMB trillion
400 100 70
350 90
60
80
300 50
70
250 60 40
200 50 30
150 40
20
30
100 10
20
50 10 0
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 Q3
0 0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021 Q3
WMPs outstanding Trust Company asset Entrust loans
Bank acceptance Private lending Others
Shadow banking Bank loans
Bank asset Shadow banking as % of GDP
Source: CBRIC, China Banking Wealth Management Product Registration
Source: CBIRC & BBVA Research & Depository Center & BBVA Research
The broad shadow banking assets declined to RMB 57.6 trillion in Q3 2021 from RMB 59.2 trillion in the
previous year, weighed by the decline in trust loans and wealth management products, resulting the ratio of
shadow banking assets as a share of nominal GDP declined to 51.5% from 58.3% at the end of 2020.China banking monitor 35
The declining trust loans due to a tighter regulatory scrutiny
TRUST COMPANY LOANS GROWTH DECLINED
RMB trillion %
9 8
8 7
7 6
6
5
5
4
4
3
3
2 2
1 1
0 0
2019Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3
2016Q1
2016Q3
2017Q1
2017Q3
2018Q1
2018Q3
2019Q3
2020Q1
2020Q3
2021Q1
2021Q3
Loans made by Trusts(LHS) Trust loan as % of bank loan(RHS)
Source: China Trustee Association & BBVA Research
Growth of outstanding trusts loans accelerated its downward trend in Q3 2021, reflecting that the
government has stepped up regulatory scrutiny of real estate trust loans and its related channel
businesses.China banking monitor 36
Trust assets continuing to shift from
infrastructure and real estate to bond market
AUTHORITIES PUT STRICT MONITOR ON THE FINANCING CHANNEL FOR INFRASTRUCTURE
AND REAL ESTATE 13.40%
14.42% 12.52%
13.74%
16.01%
14.59%
12.42%
31.47%
29.90%
4.12%
29.02%
1.78%
13.80%
14.18%
13.60%
3.52%
12.48%
2.79% 1.47%
12.12% 1.30% 7.86%
15.99%
7.50%
Infrastructure Real estate Securities market (Stock) Securities market (Fund)
Securities markets (Bond) Financial institutions Business enterprise Other
2021 Q3 2020 Q3
Source: China Trustee Association & BBVA Research Source: China Trustee Association & BBVA Research
Trust loans to real estate and infrastructure shrink due to tightened regulations. Trust assets will continue
to shift away from real estate and infrastructure to capital market in 2022.China banking monitor 37
2021 was the final year of a transition to sweeping new asset
management rules
PRINCIPAL PROTECTED WMPS THE YIELD OF WMPS CONTINUED TRENDING
OUTSTANDING HAS FURTHER DECLINED DOWN
RMB trillion %
35 20 7.0
18 6.0
30
16
5.0
25 14
4.0
12
20
10 3.0
15 2.0
8
10 6 1.0
4
0.0
5
2
0 0
2014 2015 2016 2017 2018 2019 2020 2021
Q3 Average expected annual return of new WMPs (1-Year)
Non-principal protected Principal protected
% of deposits (RHS) 1-Year deposite rate (benchmark)
Source: Wind & BBVA Research Source: Wind & BBVA Research
Overall WMPs, which acted as a major funding channel for regional banks or highly leveraged companies who
are lack of capital and cannot secure loans from traditional banks, declined to RMB 23.8 billion in the Q3 2021
compared to RMB 25.9 trillion at the end of 2020. Principal protected WMPs distributed by banks shrank further.China banking monitor 38
China crackdown of Ant Finance
RMB Trillion
10 3.0
9
2.5
8
7
2.0
6
5 1.5
4
1.0
3
2
0.5
1
0 0.0
2020 Q1
2019 Q1
2019 Q2
2019 Q3
2019 Q4
2020 Q2
2020 Q3
2020 Q4
2021 Q1
2021 Q2
2021 Q3
Yuebao asset value Money-market fund 7-day annulized rate of Yuebao (RHS) 1-year benchmark Interest rate (RHS)
Source: Wind & BBVA Research
The asset value of Yue Bao, China's largest money market fund, fell to RMB 0.76 trillion in Q3, which accounted
for only 45% of its peak level in 2018. The main reason for the decline in Yuebao’s asset value is the central
government’s stricter capital requirements and strengthened supervision on Ant Group. In addition, Yuebao's 7-
day annualized return fell to 2.05% in Q3 2021 from 2.09% in the previous quarter.China banking monitor 39
Regulatory measures to curb shadow
banking activities
Date Key Regulatory Developments
The PBoC issued the "Regulations on Non-Bank Payment Institutions (Draft for Comment)". The regulations require that the establishment of
Jan-21 non-bank payment institutions should be approved by the PBoC, and the minimum registered capital should be exceed RMB 100 million. The
new regulations aim to prevent systemic financial risks, reduce unfair competition in payments, and safeguard consumer funds.
CBIRC publishes the Interim Measures for the Administration of Internet Loans of Commercial Banks. The new regulations will strengthen the
risk management of commercial banks' internet loans, strictly control cross-regional operations, and strengthen loan risk management by setting
Feb-21 requirements for the proportion of capital contributions by commercial banks and cooperative institutions.Under the rule, tech platforms will be
forced to provide capital for 30% of the loans they offer in partnership with banks. The CBIRC will also cap how much capital commercial banks
can commit to online lending in cooperation with tech platforms, a move has hit the valuation of Ant Group.
The PBoC and CBIRC jointly publish the "Notice on Regulating the Management of Cash Management Wealth Management Products". The
regulation focuses on making the investment scope of such wealth management products basically in line with money market funds, and
strengthening the liquidity and leverage requirements of cash management products.
The CBIRC publishes the Interim Measures for the Implementation of the Recovery and Disposal Plans of Banking and Insurance Institutions.
Jun-21
The approach establishes a framework in which the risk of debt-sharing among junior creditors will increase, while clarifying that government
support can be provided to support systemically important financial institutions. The regulations apply to banks, financial asset management
companies and financial leasing companies with on- and off-balance sheet assets of RMB 300 billion or more, as well as insurance companies
with on- and off-balance sheet assets of RMB 200 billion or more.
CBIRC publishes a notice to clean up and regulate the business of non-financial subsidiaries of trust companies. The notice stipulates that trust
Jul-21 companies shall not set up domestic first-level non-financial subsidiaries, while the already established domestic first-level non-financial
subsidiaries shall not increase investment in domestic and foreign enterprises.
The CBIRC publishes the "Measures for the Management of Liquidity Risks of Wealth Management Products of Wealth Management Companies
(Draft for Comment)". The measures require wealth management companies to establish and improve the liquidity risk management system and
Sep-21
governance structure of wealth management products. The PBoC issued the "Administrative Measures for Credit Information Business", which
clarifies the scope of credit reporting business and standardize the credit reporting business process.
The PBOC and CBIRC establish final TLAC rules for Chinese G-SIBs and designated 19 commercial banks as the domestic systematically
Oct-21 important banks. The initiative also establishes an early corrective mechanism to reduce the complexity and associated systemic risks of
domestic systemically important banks, including stricter stress testing requirements for these banks' capital, liquidity and key risk exposures.
Source: Moody & BBVA ResearchChina banking monitor 40 Disclaimer This document has been prepared by BBVA Research Department. It is provided for information purposes only and expresses data, opinions or estimations regarding the date of issue of the report, prepared by BBVA or obtained from or based on sources w e consider to be reliable, and have not been independently verified by BBVA. Therefore, BBVA offers no w arranty, either express or implicit, regarding its accuracy, integrity or correctness. Any estimations this document may contain have been undertaken according to generally accepted methodologies and should be considered as forecasts or projections. Results obtained in the past, either positive or negative, are no guarantee of future performance. This document and its contents are subject to changes w ithout prior notice depending on variables such as the economic context or market fluctuations. BBVA is not responsible for updating these contents or for giving notice of such changes. BBVA accepts no liability for any loss, direct or indirect, that may result from the use of this document or its contents. This document and its contents do not constitute an offer, invitation or solicitation to purchase, divest or enter into any interest in financial assets or instruments. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind. With regard to investment in financial assets related to economic variables this document may cover, readers should be aw are that under no circumstances should they base their investment decisions on the information contained in this document. Those persons or entities offering investment products to these potential investors are legally required to provide the information needed for them to take an appropriate investment decision. The content of this document is protected by intellectual property law s. Reproduction, transformation, distribution, public communication, making available, extraction, reuse, forw arding or use of any nature by any means or process is prohibited, except in cases w here it is legally permitted or expressly authorised by BBVA.
China banking monitor 41 This report has been produced by: Chief Economist Le Xia le.xia@bbva.com Betty Huang betty .huang@bbva.com ENQUIRIES TO: BBVA Research: Azul Street. 4. La Vela Building – 4th and 5th floor. 28050 Madrid (Spain). Tel. +34 91 374 60 00 and +34 91 537 70 00 / Fax (+34) 91 374 30 25 - bbvaresearch@bbva.com / www.bbvaresearch.com / Depósito Legal: M-31254-2000
China Banking Monitor 2021 February 09, 2022
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