China’s banking sector to polarize in 2023; weak banks face failure

Overall loan growth will come below 10% in 2023, says S&P.

China’s banking sector will continue to polarize in 2023, with better resourced banks able to relax their provision coverage whilst weaker and more aggressive banks face heightened financial risks amidst intensifying regulatory scrutiny.

The Chinese banking sector as a whole has sufficient buffers to withstand loan stresses stemming from a slowing economy, property downturn, and weakening amongst small businesses, said Harry Hu, primary credit analyst, S&P Global Ratings.

“We continue to see a strong tendency for the Chinese government to provide direct or indirect support to systemically important banks and other financial institutions,” he said.

All is not smooth sailing for the smaller banks, however. “The 2020 bankruptcy of the privately owned Baoshang Bank and the bankruptcy proceedings at two rural banks in Liaoning province were a reminder that bank failures are possible in China,” he warned.

Overall loan growth will come at below 10% in 2023, worsening from the 10.6% expected for the full year of 2022.

“A moderately easing monetary environment, fierce deposit competition, and concessional loan rates to policy-preferred sectors continue to erode the sector's profitability. Property development stress lingers despite initiatives to contain the risk,” Hu noted.

In particular, asset quality pressures are rising for micro and small enterprise loan portfolios. This is a result of business concentration, a sluggish recovery in consumption, and margin squeezes.