Chinese banks' liquidity still enough despite key metrics slumping

Asset quality grew 10.8% in Q2 from 9.4% a year earlier.

Chinese banks’ key metrics continued their slump in Q2 but liquidity remained in line with government policies to anchor economic rebound, according to a Moody’s Investors Service report.

Asset quality grew 10.8% in Q2 from 9.4% a year ago due to a surge in non-loan assets, said Moody’s vice president and senior credit officer Nicholas Zhu.

"We expect non-loan shadow credit to increase in the remainder of 2020 because of the one-year delay in the implementation of new asset management regulations," he explained.

On the other hand, asset quality, capitalisation and profitability all decayed amidst pandemic-led disruptions, which is credit negative from a systemwide leverage perspective.

Regional banks triggered the increase in systemwide non-performing loan ratio to 1.94% at end-June from 1.86% six months ago. Meanwhile, the systemwide Core Tier 1 capital ratio dropped by 45bp in H1 on faster growth of risk-weighted assets, while annualised returns on assets averaged 0.91% in H1 2020.

The pressure on asset quality and profitability will remain high as consumer sentiment stays weak amidst sluggish recovery and higher credit costs despite multiple government relief measures, the report concluded.