Small Banks’ Asset Quality After COVID

The COVID-19 outbreak has slowed China’s overall economic growth, but small corporate borrowers from city and rural commercial banks have been affected most severely. In this note surveying hundreds of banks’ 1H 2020 results, we examine how forbearance measures have weakened banks’ asset quality, reduced interest income, and squeezed net interest margins and profits. There are clear signs of weakness in 1H results, but most bad loans have not yet been declared. More stress lies ahead.

Local governments are trying to merge local small banks to essentially make them “too big to fail” and allow them to compete for a share of the 200 billion yuan in bailout funds allocated from Beijing this year. But the PBOC opposes local bank consolidation, as it would reduce access to financial services for rural borrowers and local SMEs. There is a clear and growing need for a more comprehensive strategy to manage building threats to banks’ solvency, particularly for smaller local banks. A stressed banking system will struggle to maintain credit growth, and local infrastructure investment growth will slow.

Posted October 2, 2020
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