[ET Net News Agency, 31 January 2020] China's banking system faces greater risk than
may be apparent. That's according to a report, titled "China Banks May Not Be As Resilient
As Numbers Suggest," that S&P Global Ratings published today. The report analyzes the
results of the 2019 stress test by the People's Bank of China (PBOC).
"We believe that some of the relatively larger stress-tested banks could require sizable
recapitalization, as was the case for Hengfeng Bank and Bank of Jinzhou," said S&P's
credit analyst Ming Tan. "In our view, Chinese banks are more vulnerable to idiosyncratic
risks, arising from governance-related issues and risk management deficiency, than
systemic ones."
The central bank's severe stress scenario is a good starting point to examine potential
risks for China's sizable banks, in our view. Overall, S&P believes that the PBOC has
adopted more realistic assumptions in the 2019 study than in 2018, such as assuming bigger
increases in bank funding costs. The test's expanded coverage to include more financial
institutions has strengthened monitoring. It covered 30 of the country's largest banks,
each with assets of more than RMB800 billion.
Several factors contribute to bank failures, especially those related to governance such
as shareholder, related-party, or management issues, which are difficult to detect but
could have serious consequences. The recapitalizations of Hengfeng and Jinzhou in 2019
offer insights into ex-ante quantitative indicators that can signal which banks could be
vulnerable.
The agency thinks high bank acceptance (BA) exposure relative to total asset (TA) is a
useful risk indicator. It could signal governance issues given the instrument's
susceptibility to misuse, for instance as a tool for regulatory arbitrage. The BA-to-TA
ratio at Hengfeng was 25% in 2016, while at Jinzhou it was about 15% in 2017 and 26% in
2018, before moderating slightly to 25% in first-half 2019.
"We identify Bohai Bank, China Zheshang Bank, and Shengjing Bank as under more pressure
than other PBOC stress-tested banks, given their significantly large BA-to-TA ratios,"
said Tan.
China's banking system is vulnerable to governance, liquidity, and contagion risks. S&P
believes that weak governance and lack of quality and timely reporting leads to an
understatement of risks. It expects the central bank to tighten regulations to address
these risks.
As such, S&P believes the regulator will continue to proactively experiment with bank
bailout and recapitalization as it did last year, rather than passively react to bank
failure. (KL)