Capital levels at some Chinese banks risk falling below a crucial threshold meant to buffer them against financial contagion, as lenders face an incoming surge of bad debts due to coronavirus reported the Financial Times.
Beijing has called on banks to play a key role in supporting companies that are struggling to survive following the Covid-19 outbreak. Regulators have instructed lenders to brace for much higher levels of non-performing loans as the economy slowly recovers following the public health crisis, which temporarily shut down swaths of industry and supply chains.
But many Chinese banks are already struggling with asset quality problems, and lack the capital and profitability for the new lending needed to fuel a recovery. Analysts are divided on how much bad debt the current economic slowdown will create. But even the more modest forecasts show that bank capital could fall to precarious levels.
Non-performing loan ratios at banks rated by Fitch are expected to rise to about 3.5%, from 1.5% in June last year, the rating agency has said. Such a scenario would push common equity tier-1 ratios at China Minsheng Bank, Hua Xia Bank and China Guangfa Bank below the minimum regulatory requirement of 7.5%, Fitch said. A number of other midsized banks are also expected to fall close to that threshold.