China banks' NPL ratio could rise up above 6% if nCov outbreak persists

This could lead to shaving off 378 basis points from the sector’s capital adequacy ratio.

The Chinese banking industry’s non-performing loans could rise to above 6% if the Wuhan coronavirus outbreak persists, reports S&P Global Ratings. This could lead to a potential 378 basis points shaved off from the sector’s capital adequacy ratio.

"System gross non-performing 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 Global Ratings 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 $798b (RMB5.6t) C--it could potentially shave about 378 basis points off the sector's capital adequacy ratio," Mr. Tan said.

The severity will depend 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.

On the other hand, it could also help financial regulators validate and calibrate their stress-test scenarios.

The eventual impact on China's GDP will depend much on the severity of the virus attack and its disruptions to economic activities. The report noted that although China’s quarterly real GDP fell 1.7 percentage points (ppt) two quarters after the onset of SARS last 2003, the hit was 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 Global Ratings credit analyst Harry Hu.

Although the banking sector and China’s economy are much stronger today than in 2003 and are in better financial shape to meet the challenges, S&P further notes that SARS happened when the 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," added credit analyst Ryan Tsang.