Moody’s downgrades negative outlook on China’s banks as country emerges from Covid-zero

BEIJING – Ratings agency Moody’s said Wednesday it maintained a “negative” outlook on China’s banking sector as a result of a protracted recovery after Beijing eased its Covid controls.

China’s economy missed the national growth target in 2022 due to the spread of the highly contagious Omicron variant and a prolonged slowdown in the massive real estate sector. While Beijing eased its stringent Covid controls in early December, the economic rebound so far has been muted.

“The challenging adjustment to exit from zero post-COVID, for both borrowers and lenders, will weigh on banks’ asset quality and profitability over the next 12-18 months,” Moody’s said in a note on Wednesday.

“Our outlook on the banking sector remains negative,” said the report’s authors, Vice President Nicholas Zhu and Associate Managing Director Chen Huang.

Moody’s changed its outlook on China’s banks from “stable” to “negative” in November due to “deteriorating operating environment, asset quality and profitability”.

The rating agency reaffirmed its negative outlook earlier this month. Wednesday’s report focused on fourth-quarter data on Chinese banks’ operations.

Fu Linghui, a spokesman for China’s National Bureau of Statistics, told reporters on Wednesday that the pandemic has damaged corporate and individual balance sheets over the past few years, and it will take time to repair them, even if the overall economy is recovering.

The latest figures from the statistics bureau showed slower-than-expected industrial production growth, retail sales in line with expectations and better-than-expected real estate investment for the first two months of the year.

Moody’s analysts said Chinese banks face asset quality risks from non-performing loans.

Although those bad loans are not growing significantly, he said the economic environment makes it difficult for lenders and borrowers to find new sources of growth.

“The likelihood of fresh NPL formation will remain high amid the challenging adjustment to exit zero-Covid,” the report said. “We expect banks to continue disposing bad loans over the next 12-18 months so that the NPL ratio remains stable at the current level of 1.63%.”

The report said that the assets of Chinese banks grew by 10.8% last year, which was higher than the growth of 8.6% in 2021.

“We expect credit growth to pick up over the next 12-18 months, as authorities seek increased financing to reopen the economy.”

Meanwhile, analysts said they expect lower asset returns to drag on the bank’s profitability. He noted that the banks’ average return on assets declined by three basis points year-over-year in the fourth quarter.

Moody’s said it expected the capitalization of Chinese banks to remain stable with sufficient liquidity.

In addition to a modest increase in government stimulus, Moody’s said it expected Beijing to place greater emphasis on maintaining financial stability, including containment of risks to the banking system.

Preventing and mitigating risks was one of the government’s policy priorities, laid out by Premier Li Keqiang in remarks to the press on Monday.