MNI INTERVIEW: China Banks Outlook "Isn’t Great" -Charlene Chu

China could cut its reserve requirement ratio (RRR) by another 50bp this year as banks remain at risk from the troubled property sector and a squeeze on net interest margins despite proving resilient against U.S. and European banking turmoil, leading China banking analyst Charlene Chu told MNI.

“I would expect there to be very little direct spillover to the Chinese economy and banking sector unless the crisis starts to spread to Asian banks perceived to be in similarly weak positions, which could start to make Chinese depositors or investors in bank WMPs [wealth management products] nervous,” according to Chu, a senior analyst at Autonomous Research.

Despite the sharp sell-off in U.S. and European financials, the A-shares and H-shares of China’s big four banks hover near their highest levels since mid-2022, having rallied from their November lows after Beijing relaxed Covid-19 restrictions and unveiled fiscal and monetary policies to support growth (See: MNI PBOC WATCH: More RRR Cuts Seen To Keep Liquidity Ample).

Beijing unveiled a surprise cut in the RRR in mid-March, but the freeing up of bank capital reflects broader economic policy rather than a reaction to the turmoil sparked by the collapse of Silicon Valley Bank, Chu said. The 25bp cut lowered lending costs by about CNY6 billion.

“The RRR cut was not linked to the SVB fallout but was to ensure no funding constraints on lenders to keep up the Jan-Feb momentum in credit,” Chu said.

Chu expects another 50bp in RRR cuts this year, believing the transmission of cuts has improved since authorities scrapped the Covid-zero policy.

MARGIN SQUEEZE

Chu noted the fragile property market pressures the profitability of Chinese lenders.

“In general, the outlook for Chinese bank stocks isn’t great with mortgages being prepaid and mortgages rates coming down, both of which will weigh on already low net-interest margin,” she said.

Net-interest margins at China’s banks fell to historic lows in H2 2022, with Bank of China and Industrial and Commercial Bank of China – two of the big four banks - falling to 1.77% and 1.85%, according to Choice data. Chu expects the downward trend to continue.

A source of margin pressure is falling mortgage rates, which have been lowered to entice buyers into the property market. Average rates for new mortgages fell from 5.63% to 4.26% between December 2021 and December 2022. This lowered potential profits for banks but prompted existing borrowers to repay their loans as they were unable to access the lower rates, according to credit ratings agency Moody’s.

Although the scale of these payments is unknown, Chinese media have reported banks deleting early payment application forms from their websites and delaying the administration processes.

DEVELOPERS’ REPRIEVE

Bank exposure to China’s financially weakened real estate developers is another risk Chu monitors closely.

“There are also a lot of questions about credit losses associated with property developers,” she said.

“Regulators have given banks a one-year reprieve on booking exposures to developers as delinquent, but that will end late this year and investors are unsure about what the hit will be to bank credit costs.”

The systemic risk posed by China’s accumulation of debt by households, property developers and local government prompted Beijing to unveil a new super regulator at the National People’s Congress earlier this month, which will work with key regulators to control risks.

According to the Bank for International Settlements, China’s banking debt stood at USD46.7 trillion in 2022.