FINANCIAL INSTITUTIONS

OUTLOOK Banking System Outlook Update - China

2 April 2020
Stressed operating environment and rising
asset risks drive negative outlook
We have changed to negative from stable the outlook for China’s (A1 stable) banking system.
The negative outlook reflects our assessment that the broadening and growing economic and
market dislocations by disruptions caused by the coronavirus outbreak will exacerbate the
latent risk in this highly leveraged system. Government support to banks, especially those
deemed to be of systemic importance, is likely to strengthen.
Analyst Contacts
Nicholas Zhu, Ph.D. +86.10.6319.6536
» Weak economic recovery stresses the already fragile operating environment.
VP-Sr Credit Officer The coronavirus outbreak in late January 2020 has led to a sudden economic shock,
nicholas.zhu@moodys.com which is now straining Chinese banks’ operations. The resultant disruption to global trade
Yulia Wan, CFA +86.21.2057.4017 flows and increase in asset price volatilities have further weakened China’s economy and
VP-Senior Analyst reduced clarity on its recovery prospects.1 Disruptions caused by the coronavirus outbreak
yulia.wan@moodys.com
also open up the risk that authorities will try to stimulate the economy with an oversized
Ray Heung +852.3758.1514 credit injection and put the economy back on a path of debt-fueled growth, a major risk
Senior Vice President
ray.heung@moodys.com
to banking system stability.

Yan Li +86.10.6319 6561 » Asset risks are rising. The primary credit impact from disruptions caused by the
AVP-Analyst
yan.li3@moodys.com coronavirus outbreak will be rising loan delinquencies among services sectors adversely
affected by social distancing. These industries include wholesale and retail, leisure travel
Minyan Liu, CFA +852.3758.1553
Associate Managing Director and other consumer discretionary services. Related asset pressure will remain high
minyan.liu@moodys.com even after the coronavirus outbreak subsides as these businesses are highly sensitive
to consumer sentiments, which will remain weak. Regional banks are most vulnerable
CLIENT SERVICES because of their larger and more concentrated exposures to the affected industries, with
Americas 1-212-553-1653 borrowers including micro and small enterprises.
Asia Pacific 852-3551-3077
» Softening capitalization will not fully mitigate rising asset risks. Rising asset risks
Japan 81-3-5408-4100
will lead to higher risk-weighted assets and therefore lower capital ratios. State-owned
EMEA 44-20-7772-5454 banks have maintained stable capitalization, which will provide a strong buffer to a
potential rise in loan delinquencies. By contrast, regional banks have weaker capitalization
because of more aggressive asset growth.

» Profitability will decline. Slower economic activities will mean lower profitability for
banks. The central bank’s efforts to ease monetary policies and the banking regulator's
forbearance on loan payments will result in narrower net interest margins and further
erode banks' profitability. Credit costs will remain high because of elevated new problem
loan formation, despite the government's relief measures.
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

» Liquidity conditions will remain stable on more accommodative policies. The central bank has maintained adequate system
liquidity by easing monetary policies to offset disruptions caused by the coronavirus outbreak.2 State-owned banks have nationwide
franchises that will ensure access to low-cost retail deposits and underpin these banks' stable funding profiles. However, some
regional banks are likely to face funding strains from rising deposit competition. Their access to the interbank market and issuance
of negotiable certificates of deposit are also vulnerable to market sensitivity to underlying weaknesses, as highlighted by recent
restructuring of some regional banks.3

» Government support is likely to strengthen. Chinese authorities remain keen to maintain social and financial stability while
containing the coronavirus outbreak. Support to distressed banks, especially those deemed to be of systemic importance, will be
stronger and more forthcoming.

Exhibit 1
Overview of key drivers of the negative outlook for the Chinese banking system
Operating environment Deteriorating - The coronavirus outbreak in late January 2020 has led to a sudden economic shock.
- The resultant disruption to global trade flows and increase in asset price volatilities have further
weakened China’s economy and reduced clarity on its recovery prospects.
Asset risk Deteriorating - The primary credit impact from the disruptions caused by the coronavirus outbreak will be rising
loan delinquencies among services sectors.
- Related asset pressure will remain high even after the coronavirus outbreak subsides as these
businesses are highly sensitive to consumer sentiments, which will remain weak.
Capital Deteriorating - Rising asset risks will lead to higher risk-weighted assets and therefore lower capital ratios.
= State-owned banks have maintained stable capitalization, which will provide a strong buffer to a
potential rise in loan delinquencies.
- Regional banks have weaker capitalization because of more aggressive asset growth.
Profitability Deteriorating - Easing monetary policies and regulatory forbearance on loan payments will result in narrower net
interest margins.
- Credit costs will remain high because of elevated new problem loan formation, despite the
government's relief measures.

Funding and liquidity
Government support
Stable + The central bank has maintained adequate system liquidity by easing monetary policy to offset the
disruptions caused by the coronavirus outbreak.
= State-owned banks have nationwide franchises that will ensure access to low-cost retail deposits
and underpin these banks' stable funding profiles.
- Regional banks face difficulties from rising deposit competition and volatile access to market
funding.
Improving + Chinese authorities remain keen to maintain social and financial stability while containing the
coronavirus outbreak.
+ Support to distressed banks, especially those deemed to be of systemic importance, will be
stronger and more forthcoming.  

Source: Moody's Investors Service

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

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Exhibit 2
Aggregate key indicators for the rated Chinese banks

Source: Moody's Investors Service based on banks' consolidated data

Exhibit 3
Rated Chinese banks
As of 31 March 2020
Total Consolidated Assets Bank Deposit LT Rating/Issuer Bank Deposit LT Rating/Issuer
Name June 2019 (RMB billion) Baseline Credit Assessment Rating Rating Outlook

Commercial Banks:
Industrial & Commercial Bank of China Ltd 29,990 baa1 A1 STA
China Construction Bank Corporation 24,383 baa1 A1 STA
Agricultural Bank of China Limited 23,975 baa2 A1 STA
Bank of China Limited 22,088 baa1 A1 STA
Postal Savings Bank of China Co., Ltd. 10,067 baa2 A1 STA
Bank of Communications Co., Ltd. 9,887 baa3 A2 STA
China Merchants Bank Co., Ltd.** 7,417 baa3 A3 STA
Industrial Bank Co., Ltd. 6,990 ba2 Baa2 STA
Shanghai Pudong Development Bank Co., Ltd. 6,667 ba2 Baa2 STA
China CITIC Bank Corporation Limited 6,399 ba2 Baa2 STA
China Everbright Bank Company Limited 4,647 ba2 Baa2 STA
Ping An Bank Co., Ltd** 3,939 ba2 Baa2 STA
China Guangfa Bank Co., Ltd.* 2,361 ba3 Baa3 STA
Bank of Shanghai Co., Ltd. 2,165 ba1 Baa2 STA
China Zheshang Bank Co., Ltd. 1,737 ba3 Ba1 STA
Bank of Nanjing Co., Ltd. 1,348 ba2 Baa3 NEG
Bank of Ningbo Co., Ltd. 1,205 ba1 Baa2 NEG
Guangzhou Rural Comm Bank Co., Ltd. 853 ba1 Baa2 NEG
HSBC Bank (China) Company Limited* 476 baa1 A1 NEG
Bank of Suzhou Co., Ltd. 341 ba2 Ba1 NEG
Shenzhen Rural Commercial Bank Corp Ltd* 317 ba1 Baa3 NEG
WeBank Co., Ltd.* 220 ba1 A3 STA
MUFG Bank (China), Ltd.* 157 baa3 A3 STA
DBS Bank (China) Limited* 127 baa3 A1 STA
Hang Seng Bank (China) Limited** 102 baa3 A2 STA
Fubon Bank (China) Co., Ltd.* 71 ba2 Baa1 NEG
E. Sun Bank (China) Limited* 11 ba2 Baa2 STA
Average (asset-weighted) baa2 A2
Policy Banks:
China Development Bank*^ 16,180 N/A A1 STA
Agricultural Development Bank of China*^ 6,853 N/A A1 STA
Export-Import Bank of China (The)*^ 4,194 N/A A1 STA

* Based on 2018 financials; ** based on 2019 financials; ^ ratings for these banks refer to senior unsecured debt or issuer rating. A bank’s Baseline Credit Assessment (BCA), a measure of its
standalone credit strength, reflects its creditworthiness without taking support assumptions into account. Long-Term Bank Deposit Ratings reflect a bank’s standalone credit strength and
support considerations.
Source: Moody's Investors Service

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Exhibit 4
Chinese Banks BCA distribution
As of 31 March 2020
10

7
Number of banks

0
baa1 baa2 baa3 ba1 ba2 ba3
Baseline Credit Assessment

Source: Moody's Investors Service

Banking System Outlook Definition

Banking system outlooks represent our forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of
banks in a given system over the next 12-18 months. As such, banking system outlooks provide our view of how the operating environment for
banks, including macroeconomic, competitive and regulatory trends, will affect asset quality, capital, profitability, funding and liquidity.

Banking system outlooks also consider our forward-looking view of the systemic support environment for bank creditors.

Since banking system outlooks represent our forward-looking view on credit conditions that factor into our bank ratings, a negative (positive)
outlook suggests that negative (positive) rating actions are more likely on average.

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Moody’s related publications

Newsletters:

» Banks - China Quarterly: Asset performance weakens on slowing economy, 2019.12

» Banks - China Quarterly: Asset risk rising from faster asset growth but offset by liquidity and capital raising, 2019.09

» Banks - China Quarterly: Adequate liquidity and capital raising mitigate risk from quickened asset growth, 2019.07

» Banks - China Quarterly: Moderate asset growth and adequate system liquidity mitigate asset risk, 2019.03

Sector In-Depths:

» Financial Institutions - China: 2020 outlook, 2019.12

» Banks - China: Tight liquidity is a credit risk for some regional banks, 2019.11

» Banking System Outlook - China: Outlook stable on adequate liquidity and capitalization despite operating difficulties, 2019.10

» Banks - China: Capital eases on strong loan growth but asset performance remains stable, 2019.09

» Banks - China: Government support remains strong but will be more selective, 2019.09

» Foreign banks - China: FAQ: Evolving regulations to support broadening in funding channels, 2019.06

Sector Comments:

» Banks - China: PBOC's reserve requirement cut will help ease profitability pressure, a credit positive for the affected banks, 2020.03

» Financial Institutions - China: Recapitalization of Bank of Jinzhou will help mitigate contagion risk, a credit positive, 2020.03

» Banks - China: Loan prime rate decline will weaken margins and profitability, a credit negative, 2020.02

» Banks - China: Baoshang Bank's asset sales accelerate its resolution, containing contagion risk, 2020.02

» Banks - China: Coronavirus outbreak will weigh on banks' asset quality, a credit negative, 2020.02

» Banks - China: China clarifies capital securities’ loss-absorption features, a credit positive for senior creditors, 2019.12

» Banks - China: China assesses domestic systemically important banks to prevent risks, 2019.11

» Banks - China: Draft net capital rules for wealth-management subsidiaries are credit positive, 2019.09

» Banks - China: New prime rate mechanism is credit negative for Chinese bank's profitability, 2019.08

» FIs - China: Investment in Bank of Jinzhou by three state-owned financial institutions is credit positive, 2019.08

» Banks - China: New preference share issuance guidelines are credit positive for smaller Chinese banks, 2019.07

» Banks - China: Resolution of Baoshang Bank limits losses for large wholesale creditors, a credit positive for banks, 2019.06

» Banks - China: PBOC’s credit enhancement to a regional bank’s negotiable certificate of deposit is credit positive, 2019.06

» Banks - China: Initial plan to resolve Baoshang Bank is credit negative for large wholesale creditors, 2019.05

» Banks - China: Tightened risk asset classification is credit positive, 2019.05

Credit Opinions:

» Industrial & Commercial Bank of China Limited

5 2 April 2020 Banking System Outlook Update - China: Stressed operating environment and rising asset risks drive negative outlook
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» China Construction Bank Corporation

» Bank of China Limited

» Agricultural Bank of China Limited

» Postal Savings Bank of China Corporation Limited

» Bank of Communications Corporation Limited

» China Merchants Bank Corporation Limited

» China CITIC Bank Corporation Limited

» China Everbright Bank Company Limited

» Shanghai Pudong Development Bank Corporation Limited

» Industrial Bank Corporation Limited

» Ping An Bank Corporation Limited

» China Guangfa Bank Corporation Limited

» China Zheshang Bank Corporation Limited

» Bank of Shanghai Corporation Limited

» Bank of Nanjing Corporation Limited

» Bank of Ningbo Corporation Limited

» Guangzhou Rural Commercial Bank Corporation Limited

» Shenzhen Rural Commercial Bank Corporation Limited

» Bank of Suzhou Corporation Limited

» WeBank Company Limited

» HSBC Bank (China) Company Limited

» Hang Seng Bank (China) Limited

» MUFG Bank (China) Limited

» DBS Bank (China) Limited

» Fubon Bank (China) Corporation Limited

» E. Sun Bank (China) Limited

» China Development Bank

» Agricultural Development Bank of China

» Export-Import Bank of China (The)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

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Endnotes
1 See Moody's publication Coronavirus, oil shock hurt asset quality; monetary response reduces profitability, 23 March 2020.
2 These easing policies include a reduction by 10 basis points to the interest rate of the main monetary policy instrument, the medium-term lending facility;
two reductions, totaling 30 basis points, to the interest rate of the central bank reverse repo transactions; and a cut to reserve requirement ratios by
50-150 basis points for qualified banks to stimulate lending to micro and small enterprises (see Moody's publication PBOC's reserve requirement cut will
help ease profitability pressure, a credit positive for the affected banks, 18 March 2020).
3 See Moody's publications Recapitalization of Bank of Jinzhou will help mitigate contagion risk, a credit positive, 16 March 2020 and Baoshang Bank's asset
sales accelerate its resolution, containing contagion risk, 13 February 2020.

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8 2 April 2020 Banking System Outlook Update - China: Stressed operating environment and rising asset risks drive negative outlook