With the economic impact of the coronavirus outbreak now a key uncertainty for investors, focus will start to shift to the second-order impact on the health of individual companies and financial institutions. For Chinese banks, concerns about their asset quality were never far from the surface, as some banks had not recognized loans that were overdue in last year’s annual reports, but will be forced to classify these loans as non-performing in their 2019 results.
Based on listed banks’ 1H2019 financial statements, banks may be forced to recognize as much as 1 trillion yuan in additional non-performing loans, which may rise based on the slowdown in credit growth since Baoshang Bank’s default in May 2019. Additionally, the secondary consequences of the coronavirus outbreak will trigger additional asset quality concerns, as firms drain cash reserves and regulators push banks for forbearance.
