[ET Net News Agency, 4 February 2020] The resilience of China's banking system may be
severely tested if the virus outbreak drags on, S&P Global Ratings said today in a report
titled, "Coronavirus In China: Domestic Banks To Face Stress Test."
The severity depends on how quickly the government can stabilize the situation and
restore normalcy, and the effectiveness of the measures taken to soften the negative
impacts on the economy. The outbreak could also help financial sector regulators validate
and calibrate their stress-test scenarios.
"System gross nonperforming loans (NPL) ratio could rise above 6% if this public health
emergency is prolonged, based on the stressed relationship in-principle between GDP and
NPL," said S&P's credit analyst Ming Tan.
"If this happens, the provision coverage could fall to 55% from 188%. And assuming banks
made full provision on those new NPLs--amounting to about RMB5.6 trillion--it could
potentially shave about 378 basis points off the sector's capital adequacy ratio," Tan
said.
The eventual impact on China's GDP will depend much on the severity of the virus attack
and its disruptions to economic activities, in our view. Although a multitude of factors
affect growth, our examination of the period when SARS hit shows that China's quarterly
real GDP declined by about 1.7 percentage points relative to its trend in the second
quarter after its onset. This hit was short-lived and activity rebounded strongly in the
subsequent quarters.
"Given the current contagion is already more widespread, the GDP trajectory for the
novel coronavirus could be worse, if it is not contained soon," said S&P's credit analyst
Harry Hu. "This health event tests the traditional credit risk-driven stress assumptions
employed in the central bank's severe scenario."
Although the Chinese banking sector and the economy are much stronger today than they
were in 2003 and are in better financial shape to meet the challenges, SARS happened when
the Chinese economy was gaining momentum after joining the World Trade Organization in
2001. With that momentum, the economy probably rebounded from SARS faster than it
otherwise would.
"Currently, the Chinese economy is facing multiple risks, which could slow down the
recovery of economic activities and potentially bring more pain to the banking sector,"
said S&P's credit analyst Ryan Tsang. (KL)