Coronavirus could test China banks

  • By S&P editorial

The resilience of China's banking system may be severely tested if the coronavirus virus outbreak drags on according to S&P. 

In its report, Coronavirus In China: Domestic Banks To Face Stress Test, the ratings agency found that the severity depends on how quickly the government can stabilise the situation and restore normalcy, and the effectiveness of the measures taken to soften the negative impacts on the economy. 

However, at this stage, there are no ratings implications for China’s banks. 

The report also found that 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 per cent if this public health emergency is prolonged, based on the stressed relationship in-principle between GDP and NPL," S&P credit analyst Ming Tan said. 

"If this happens, the provision coverage could fall to 55 per cent from 188 per cent. And assuming banks made full provision on those new NPLs - amounting to about Chinese renminbi (RMB) 5.6 trillion--it could potentially shave about 378 basis points off the sector's capital adequacy ratio,” Tan added. 

In S&P’s view, the eventual impact on China's GDP will depend much on the severity of the virus attack and its disruptions to economic activities. 

“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,” Tan said. 

The report also noted that 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," S&P credit analyst Ryan Tsang said.