40
China Banking Monitor Nov 2019 2H 2019
China Banking
Monitor
Nov 2019
2H 2019
01
02
03
Macroeconomic environment
Performance of banking sector
Shadow banking activities
Index
3 China banking monitor
Main takeaways
Credit growth slumped in
October weighed by
weak corporate demand
coupled with seasonal
effects, reflecting that
the efforts to funnel
credit to the real
economy are showing
little success.
Bank assets
growth picked up
to 7.7% in the first
three quarters
supported by a
higher loan
growth rate.
Asset quality deteriorated
in the Q3 2019 as banks
report a higher non-
performing loan ratio.
Asset quality diverged
among big and smaller
banks on a stricter
standard of NPLs
recognition.
Banks’ net profit
growth and net
interest margin
(NIM) picked up as
banks shift to
relatively high-yield
retail credit from
interbank activities
coupled with a
lower wholesale
funding cost.
Capital adequacy
ratio dropped on
faster growth in risk-
weighted assets.
Small banks are still
subject to capital
shortfalls amid
deteriorating asset
quality and persistent
regulations on
shadow banking
activities.
Banks’
liquidity
remained
adequate but
is subject to
challenges of
credit events.
Banks
interconnected
ness with the
shadow
banking system
has further
decreased.
Credit growth remained weak
mainly supplied through banks’
balance sheet
01
Macroeconomic
environment
China banking monitor 5
Deteriorating investment and external shocks continue putting
downward pressure on the economic growth
GROWTH CONTINUED ITS DOWNWARD TREND
IN Q3 2019 TO 6% FROM 6.2% IN Q2
BBVA MICA MODEL FOR MONTHLY GDP
FORECASTING (% YOY)
The economic growth dropped to a three decades low of 6.0% in the third quarter
weighed by a significant decline in fixed-asset investment and the instability from the
trade tensions. Growth is expected to cool to 6% in the whole of 2019.
Source: CEIC, Haver & BBVA Research Source: CEIC & BBVA Research
-2
0
2
4
6
8
Ma
r-1
5
Ju
n-1
5
Se
p-1
5
De
c-1
5
Ma
r-1
6
Ju
n-1
6
Sep-1
6
De
c-1
6
Ma
r-1
7
Ju
n-1
7
Se
p-1
7
De
c-1
7
Ma
r-1
8
Ju
n-1
8
Se
p-1
8
De
c-1
8
Ma
r-1
9
Ju
n-1
9
Se
p-1
9
%
Consumption Investment Net Exports GDP growth
3%
4%
5%
6%
7%
8%
9%
10%
Se
p-1
5
De
c-1
5
Ma
r-1
6
Ju
n-1
6
Se
p-1
6
De
c-1
6
Ma
r-1
7
Ju
n-1
7
Se
p-1
7
De
c-1
7
Ma
r-1
8
Ju
n-1
8
Se
p-1
8
De
c-1
8
Ma
r-1
9
Ju
n-1
9
Se
p-1
9
Hu
nd
red
sActual GDP Growth
BBVA-MICA GDP Growth (Monthly)
China banking monitor 6
SHANGHAI COMPOSITE INDEX CSI 300 AND GROWTH ENTERPRISE INDEXES
Stock market was triggered a sell off weighed by the escalating trade tensions,
potentially wiping out most of the market’s year-to-date rallies. Margin lending to
buy Chinese stocks is on the rise before slump
Uncertainly in trade talks weighed on stocks
Source: Wind & BBVA Research Source: Wind & BBVA Research
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
0
500
1000
1500
2000
2500
No
v-1
5
Feb
-16
Ma
y-1
6
Au
g-1
6
No
v-1
6
Fe
b-1
7
Ma
y-1
7
Au
g-1
7
No
v-1
7
Fe
b-1
8
Ma
y-1
8
Au
g-1
8
No
v-1
8
Fe
b-1
9
Ma
y-1
9
Au
g-1
9
No
v-1
9
Daily balance of margin lending (LHS)
Shanghai Composite Index (RHS)
RMB bn
2000
3000
4000
5000
6000
7000
8000
No
v-1
7
Jan-1
8
Ma
r-1
8
Ma
y-1
8
Ju
l-1
8
Se
p-1
8
No
v-1
8
Jan-1
9
Ma
r-1
9
Ma
y-1
9
Ju
l-1
9
Se
p-1
9
No
v-1
9
CSI growth Enterprise Index CSI 300 Index
CSI Bank Industry Index
China banking monitor 7
We expect the final deal won’t include substantive changes to China’s state-driven economic model, and a
tech war that US efforts to constrain China’s technological rise will not stop.
On 10th May, US
government ratcheted up
tariffs on $200 bn of
Chinese goods from 10%
to 25%,and also signaled
to impose duties on
another $300 bn of
Chinese products so
far unscatched.
On 29th June, Trump and
Xi held a meeting at the
sideline of G20 in Osaka,
Japan. Both sides agreed to
restart the bilateral
negotiation.
On 15th Aug, the US
announced a new round of
tariffs, additional 5% on
Chinese exports to penalize
China’s retaliation.
On 29th Aug, the US
officially labelled China as a
currency manipulator
country.
On 11th Oct, Trump
announced “Phase One” of
a long-awaited trade deal
with China.US agreed to
cancel its planned October
15 tariff hike in exchange for
China resuming purchases
of US agricultural goods.
15th Dec will be the key
date to see if a partial deal
could be finalized.
U.S. accusation of China’s backtracking
Xi-Trump meeting in Osaka
US hiked the tariffs again, trade war escalated
China-US announced the Phase One deal
Source: BBVA Research
Prospect for a quick resolution to end
the trade war has faded
China banking monitor 8
FURTHER EASING OF MONETARY
POLICY IS EXPECTED…
INTEREST RATES ARE FALLING AS
THE CENTRAL BANK EASES
The central bank has cut required reserve ratio 4 times in 2018, followed by another 2 cuts in January and September this year.
To facilitate the bank credit channel into the real economy, authorities introduced the targeted medium-term lending facility
(TMLF) to provide long-term funding for banks to support the small and medium sized enterprises (SMEs)
Source: CEIC & BBVA Research Source: Haver & BBVA Research
Supportive economic policies have been implemented
to bolster the domestic economy
10
12
14
16
18
20
22
24
Ma
r-1
0
Au
g-1
0
Ja
n-1
1
Ju
n-1
1
No
v-1
1
Ap
r-1
2
Se
p-1
2
Fe
b-1
3
Ju
l-1
3
De
c-1
3
Ma
y-1
4
Oct-
14
Ma
r-1
5
Au
g-1
5
Jan-1
6
Jun-1
6
No
v-1
6
Ap
r-1
7
Se
p-1
7
Fe
b-1
8
Ju
l-1
8
De
c-1
8
Ma
y-1
9
Oct-
19
Required Reserve Ratio: Large Depository Institution
Required Reserve Ratio: Small and Medium Depository Institution
%
0
1
2
3
4
5
6
7
Apr-
15
Jul-1
5
Oct-
15
Ja
n-1
6
Ap
r-1
6
Jul-1
6
Oct-
16
Ja
n-1
7
Ap
r-1
7
Ju
l-1
7
Oct-
17
Ja
n-1
8
Apr-
18
Jul-1
8
Oct-
18
Ja
n-1
9
Ap
r-1
9
Ju
l-1
9
Oct-
19
Treasury Bond Yield: Interbank: Spot Yield: 10 year
Shanghai Interbank Offered Rate (SHIBOR): 3 Month
Interbank Repo Fixing Rate: NIBFC: 7 Days
%
China banking monitor 9
THE PBOC SET LPR AS THE NEW
MONETARY TARGET RATE
THE MOVE FURTHER IMPROVES THE
NEW MONETARY CORRIDOR SYSTEM
The PBOC set Loan Prime Rate (LPR) as the new monetary target rate to help transmit the money market rate
to flow to the real economy, effectively cut interest rate. We expect the central bank to maintain its policy
easing to support growth.
Source: Wind & BBVA Research Source: CEIC & BBVA Research
PBoC set the Loan Prime Rate (LPR) as the new target
monetary rate
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Ma
y-1
7
Jul-1
7
Sep-1
7
No
v-1
7
Jan-1
8
Ma
r-1
8
Ma
y-1
8
Jul-1
8
Sep-1
8
No
v-1
8
Jan-1
9
Ma
r-1
9
Ma
y-1
9
Jul-1
9
Sep-1
9
No
v-1
9
SLF-1month MLF-6 month
DR007 (1mma) Excess reserve rate
%
2.000
2.500
3.000
3.500
4.000
4.500
5.000
Ma
r-1
7
Ma
y-1
7
Ju
l-1
7
Se
p-1
7
No
v-1
7
Ja
n-1
8
Ma
r-1
8
Ma
y-1
8
Ju
l-1
8
Se
p-1
8
No
v-1
8
Ja
n-1
9
Ma
r-1
9
Ma
y-1
9
Ju
l-1
9
Sep-1
9
No
v-1
9
MLF LPR
%
China banking monitor 10
NEW CREDIT SUPPLY IS MAINLY
THROUGH BANKS’ BALANCE SHEET
BOTH M1 AND M2 WERE BOOSTED BY
PRO-GROWTH MEASURES
Growth of outstanding total social financing (TSF), a broad measure of credit in the economy, slumped in
October weighed by weak corporate demand coupled with seasonal effects, reflecting that the effects to
funnel credit to the real economy are showing little success.
Source: Wind & BBVA Research Source: CEIC & BBVA Research
Credit growth slumped in October
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Ma
y-0
2
Ap
r-0
3
Ma
r-0
4
Fe
b-0
5
Ja
n-0
6
De
c-0
6
No
v-0
7
Oct-
08
Se
p-0
9
Au
g-1
0
Ju
l-1
1
Ju
n-1
2
Ma
y-1
3
Apr-
14
Ma
r-1
5
Fe
b-1
6
Ja
n-1
7
De
c-1
7
No
v-1
8
Oct-
19
Money Supply M1 Money Supply M2
y/y %
6
8
10
12
14
16
18
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Ju
n-1
7
Au
g-1
7
Oct-
17
De
c-1
7
Feb
-18
Ap
r-1
8
Ju
n-1
8
Au
g-1
8
Oct-
18
De
c-1
8
Fe
b-1
9
Ap
r-1
9
Ju
n-1
9
Au
g-1
9
Oct-
19
RMB trn
New loan (RMB) New loan (FX)
Entrusted loan Trust loan
Bank acceptance Net corporate bond
Non-finan. enterprise equity Other
Bank credit growth (RHS)
% yoy
11 China banking monitor
CHINESE VULNERABILITY SENTIMENT INDEX (CVSI) (EVOLUTION OF THE “TONE” OF MAIN FOLLOWED THEMES ABOUT VULNERABILITY IN CHINA. LOWER VALUES
INDICATE A DETERIORATION OF SENTIMENT AND HIGHER VULNERABILITY)
Vulnerability sentiment index has shown a greater volatility
to the downside amid the escalating trade war tensions
-3
-2
-1
0
1
2
3
Ma
r-1
5
Ma
y-1
5
Ju
l-1
5
Se
p-1
5
No
v-1
5
Ja
n-1
6
Ma
r-1
6
Ma
y-1
6
Ju
l-1
6
Se
p-1
6
No
v-1
6
Ja
n-1
7
Ma
r-1
7
Ma
y-1
7
Ju
l-1
7
Se
p-1
7
No
v-1
7
Ja
n-1
8
Ma
r-1
8
Ma
y-1
8
Ju
l-1
8
Se
p-1
8
No
v-1
8
Ja
n-1
9
Ma
r-1
9
Ma
y-1
9
Ju
l-1
9
Se
p-1
9
No
v-1
9
* Please refer to our previous report for detailed information
https://www.bbvaresearch.com/en/publicaciones/tracking-chinese-vulnerability-in-real-time-using-big-data-2/
Declin
ing S
entim
ent
(Hig
he
r Vu
lne
rab
ility)
Impro
vin
g S
entim
ent
(Lo
wer V
uln
era
bility
)
Stock Market
Crash
3% Devaluation
"Black Monday”
Stock market crash,
trade halted for 3
day
PMI falls
to 4-Y low
NPC meeting
RMB enters IMF's SDR
basket
NPC
Accepts
Lower
Growth
Target
Downgrading by the
Moody’s
Neutral Area +- 1std Rising trade
war threat
US to impose extra 10%
tariffs on $200 billion in
Chinese goods instead of
25%
Prospect of a
trade war truce
Trade dispute
escalation
Phase one
deal
12 China banking monitor
SOE and exchange rate sentiment index perform weakly
HOUSING BUBBLE VULNERABILITY INDEX SOE VULNERABILITY INDEX
EXCHANGE RATE VULNERABILITY INDEX SHADOW BANKING VULNERABILITY INDEX
-5
-4
-3
-2
-1
0
1
2
3
Ma
y-1
5
Aug-1
5
No
v-15
Feb
-16
Ma
y-1
6
Aug-1
6
No
v-16
Feb
-17
Ma
y-1
7
Aug-1
7
No
v-17
Feb
-18
Ma
y-1
8
Aug-1
8
No
v-18
Feb
-19
Ma
y-1
9
Aug-1
9
No
v-19
-4
-3
-2
-1
0
1
2
3
Ma
y-1
5
Au
g-1
5
No
v-1
5
Fe
b-1
6
Ma
y-1
6
Au
g-1
6
No
v-1
6
Fe
b-1
7
Ma
y-1
7
Au
g-1
7
No
v-1
7
Fe
b-1
8
Ma
y-1
8
Au
g-1
8
No
v-1
8
Fe
b-1
9
Ma
y-1
9
Au
g-1
9
No
v-1
9
-3
-2
-1
0
1
2
3
Ma
y-1
5
Au
g-1
5
No
v-1
5
Fe
b-1
6
Ma
y-1
6
Au
g-1
6
No
v-1
6
Fe
b-1
7
Ma
y-1
7
Au
g-1
7
No
v-1
7
Fe
b-1
8
Ma
y-1
8
Au
g-1
8
No
v-1
8
Fe
b-1
9
Ma
y-1
9
Au
g-1
9
No
v-1
9
-4
-3
-2
-1
0
1
2
3
Ma
y-1
5
Au
g-1
5
No
v-1
5
Fe
b-1
6
Ma
y-1
6
Au
g-1
6
No
v-1
6
Fe
b-1
7
Ma
y-1
7
Au
g-1
7
No
v-1
7
Fe
b-1
8
Ma
y-1
8
Au
g-1
8
No
v-1
8
Fe
b-1
9
Ma
y-1
9
Au
g-1
9
No
v-1
9
Banks are suffered from the pressure of
raising capital as concerns over the health
of the financial system grows.
02
Performance of
banking Sector
14 China banking monitor
Source: CBRIC & BBVA Research
A snapshot of financial fundamentals
2017 Q3 2017 Q42018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3
Asset quality and credit risk
Loans/total assets 47.6% 47.6% 48.8% 49.6% 50.4% 50.8% 51.5% 51.8% 52.7%
NPL ratio 1.74% 1.74% 1.75% 1.86% 1.87% 1.83% 1.80% 1.81% 1.86%
(NPL+special-mention loan) ratio 5.31% 5.23% 5.18% 5.14% 5.11% 4.93% 4.80% 4.74% 4.84%
Provisions/NPLs 180.4% 181.4% 191.3% 178.7% 180.7% 186.3% 192.2% 190.6% 187.6%
Profitability & efficiency
NIM 2.07% 2.10% 2.08% 2.12% 2.15% 2.18% 2.17% 2.18% 2.19%
Cost to income ratio 28.6% 31.6% 27.3% 27.4% 28.0% 30.8% 26.7% 27.5% 28.6%
ROE 14.14% 13.94% 13.75% 13.55% 13.35% 13.15% 12.96% 12.79% 12.57%
ROA 1.03% 1.01% 1.01% 1.01% 1.00% 1.00% 0.99% 0.98% 0.97%
Solvency
Tier 1 ratio 11.2% 11.4% 11.3% 11.2% 11.3% 11.6% 11.5% 11.4% 11.8%
Core Tier 1 10.7% 10.8% 10.7% 10.7% 10.8% 11.0% 11.0% 10.7% 10.9%
Leverage ratio 6.4% 6.5% 6.5% 6.5% 6.6% 6.7% 6.6% 6.6% 6.8%
NPLs/ Capital 10.4% 10.2% 10.3% 11.2% 11.1% 10.7% 10.6% 10.8% 10.9%
Liquidity and funding
Deposits/Total assets 65.7% 65.0% 66.1% 66.5% 66.6% 66.2% 66.6% 66.5% 67.0%
Non-deposits funding (Central bank,
bonds, NCDs, ...) / Total assets 38.1% 38.7% 37.9% 38.1% 38.0% 38.5% 37.4% 37.4% 37.3%
Loan to deposit ratio 70.0% 70.6% 71.2% 72.3% 73.6% 74.3% 72.2% 72.9% 74.4%
Current assets/ Current liabilities 49.2% 50.0% 51.4% 52.4% 52.9% 55.3% 56.8% 55.8% 57.0%
Liquidity coverage ratio 120.2% 123.3% 125.3% 131.3% 127.8% 138.0% 141.1% 140.2% 137.3%
China banking monitor 15
BANKING ASSETS HAS MODERATED ITS
GROWTH RATE
LARGE AND SHAREHOLDING COMMERCIAL
BANKS STILL DOMINATE
China’s banking sector assets picked up to 7.7% yoy at the end of Q3 2019 from 6.3% at the end of
2018,with total assets reached RMB284.7tn. By category, the aggregated assets of large commercial banks
accounted for 39.6% of the sector’s total, representing a rise of 3% from the share at the end of 2018.
Source: CBRIC & BBVA Research Source: CBIRC & BBVA Research
Bank assets growth moderated on government’s efforts
to curtail shadow banking and interbank activities
100
150
200
250
300
350
0
50
100
150
200
250
300
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19 Q
3
Banking assets Banking liabilities
Bank assets % of GDP Bank liability % of GDP
RMB trn %
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19 Q
3
Others Rural Commercial Bank
City Commercial Bank Share Holding Commercial Bank
Large Commercial Bank
China banking monitor 16
LOANS GREW FASTER THAN NON-
LOAN ASSETS…
…AS WELL AS THE NOMINAL GDP
Higher loan growth rate contribution to the asset growth amid authorities called for more lending to the
small and medium sized companies (SMEs), the amount of loans to small and micro companies continued
growing and increased by 17% qoq to RMB 647.1bn. Non-loan assets which are believed to be associated
with shadow banking activities also increased.
New credit are mainly supplied through
banks’ balance sheet
Source: CEIC & BBVA Research Source: CEIC & BBVA Research
0%
5%
10%
15%
20%
25%
Ma
y-1
4
Sep-1
4
Ja
n-1
5
Ma
y-1
5
Se
p-1
5
Ja
n-1
6
Ma
y-1
6
Se
p-1
6
Ja
n-1
7
Ma
y-1
7
Se
p-1
7
Jan-1
8
Ma
y-1
8
Se
p-1
8
Ja
n-1
9
Ma
y-1
9
Se
p-1
9
Loan growth rate Nominal GDP growth rate
-5%
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
300
Ju
n-1
6
Se
p-1
6
De
c-1
6
Ma
r-1
7
Ju
n-1
7
Se
p-1
7
De
c-1
7
Ma
r-1
8
Ju
n-1
8
Se
p-1
8
De
c-1
8
Ma
r-1
9
Ju
n-1
9
Se
p-1
9
Other assets Loan
Loan growth rate (RHS) Other assets growth rate (RHS)
RMB trn
China banking monitor 17
Growth of loans to individuals continued to outpace that of corporate one, reflecting weaker demand for
credit from companies as their confidence has been affected by the trade war although banks have
stepped up lending to infrastructure projects and privately owned small and medium-sized enterprises.
Source: CEIC & BBVA Research
Corporate loans growth rate still lag behind individual
loans
China banking monitor 18
NPLS RATIO WORSENED ON AN INCREASE IN
BAD LOANS
…SPECIAL- MENTION LOAN RATIO
DECREASED
Asset quality deteriorated in the Q3 2019 as banks report higher non-performing loan ratio, which edged up
by a 3 bps compared with the level at the end of 2018. However, special-mention loan ratio declined to
2.99%, resulting banks overall NPL ratio dropped to 4.74% in Q3 2019 from 4.92% at the end of 2018 if
added the special-mention loan ratio.
Asset quality deteriorated as an increase in bad loans…
Source: CEIC & BBVA Research Source: CEIC & BBVA Research
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0
500
1,000
1,500
2,000
2,500
Ma
r-1
1
Sep-1
1
Ma
r-1
2
Sep-1
2
Ma
r-1
3
Sep-1
3
Ma
r-1
4
Sep-1
4
Ma
r-1
5
Sep-1
5
Ma
r-1
6
Sep-1
6
Ma
r-1
7
Sep-1
7
Ma
r-1
8
Sep-1
8
Ma
r-1
9
Sep-1
9
NPL (LHS) NPL Ratio (RHS)
RMB bn %
0
50
100
150
200
250
300
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Sep-17 Mar-18 Sep-18 Mar-19 Sep-19
Special-mention Loan Ratio Substandard Loan Ratio
Doubtful Loan Ratio Loss Loan Ratio
Provision coverage ratio(RHS)
% %
China banking monitor 19
MARKED RISE IN RURAL COMMERCIAL
BANK’S NPL RATIO
NPL LANDSCAPE BY REGION
Rural and city commercial banks suffered a higher NPL ratio increase as the regulators have
enforced a stricter standard of NPL recognition policy since last year. Troubled banks are most
numerous in north China.
NPLs are rising for city and foreign
banks
Source: CEIC & BBVA Research Source: CEIC & BBVA Research
=> 2.0
1.2-1.6
0.8-1.2
<0.8
1.6-2.0
NPL%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Q3
Average Commercial Bank Large Commercial Bank
Share Holding Commercial Bank City Commercial Bank
Rural Commercial Bank Foreign Bank
%
China banking monitor 20
NET INTEREST MARGIN (NIM) IMPROVED in 1H
2019
BANK’S LOAN PRICING CAPACITY DECLINED
AMID THE MONETARY EASING
Both banks net profit growth rate and net interest margin (NIM) picked up at a modest pace as banks shift to
relatively high-yield retail credit from interbank activities. Moreover, the overall debt cost of commercial banks
generally declined amid an easing environment. While the challenges remain high for banks loan pricing as
impairment cost remain high and deposit competition continues based on the new LPR.
Banks’ net profit managed to grow at
a modest pace
Source: CBRIC & BBVA Research Source: CBRIC & BBVA Research
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
De
c-1
6
Fe
b-1
7
Apr-
17
Ju
n-1
7
Au
g-1
7
Oct-
17
De
c-1
7
Fe
b-1
8
Ap
r-1
8
Ju
n-1
8
Au
g-1
8
Oct-
18
De
c-1
8
Fe
b-1
9
Ap
r-1
9
Ju
n-1
9
Above benchmark (above 50%)
Above benchmark (above 0%, below 50%)
At benchmark
Below benchmark
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2011 2012 2013 2014 2015 2016 2017 2018 2019Q3
Net Profit Net Interest Margin(RHS)
RMB bn %
China banking monitor 21
Although Net interest margin (NIM) maintained a small increase in Q3,both the return on equity (ROE) and return on
assets (ROA) continue decreasing. It is related to the shrinkage of banks off-balance-sheet businesses (shadow
banking), which used to contribute substantially to banks’ profit growth with no change of balance sheet size.
However, ROA and ROE continue its
weak performance
Source: CBRIC & BBVA Research
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
10
12
14
16
18
20
22
24
Se
p-1
5
De
c-1
5
Ma
r-1
6
Ju
n-1
6
Sep-1
6
De
c-1
6
Ma
r-1
7
Jun-1
7
Se
p-1
7
De
c-1
7
Ma
r-1
8
Ju
n-1
8
Se
p-1
8
De
c-1
8
Ma
r-1
9
Ju
n-1
9
Se
p-1
9
ROE(LHS) ROA(RHS)
4mma % 4mma %
China banking monitor 22
CAPITAL ADEQUACY RATIO INCREASED DUE TO
THE ISSUANCE OF TIER 2 CAPITAL INSTRUMENT
HOWEVER, CHINESE BANKS’ CAR STILL LAG
BEHIND THEIR MAJOR EMS PEERS
The capital adequacy ratio rose but the core tier 1 capital ratio dropped, as the fast growth of loans
contributes to faster growth in risk-weighted assets. Banks are suffered from the pressure of raising
capital as concerns over the health of the financial system grows.
Source: CBRIC & BBVA Research Source: CBRIC & BBVA Research
Capital buffers remained adequate
12% 13%
14%15% 16% 16% 16%
17% 18% 18% 18%
23%
0%
5%
10%
15%
20%
25%
Ru
ssia
Ind
ia
Ch
ina
Peru
Me
xic
o
Arg
entin
a
So
uth
Afr
ica
Ma
laysia
Turk
ey
Hu
nga
ry
Bra
zil
Ind
on
esia
8
9
10
11
12
13
14
15
Sep-1
3
Jan-1
4
Ma
y-1
4
Se
p-1
4
Ja
n-1
5
Ma
y-1
5
Se
p-1
5
Ja
n-1
6
Ma
y-1
6
Se
p-1
6
Ja
n-1
7
Ma
y-1
7
Se
p-1
7
Ja
n-1
8
Ma
y-1
8
Se
p-1
8
Ja
n-1
9
Ma
y-1
9
Se
p-1
9
Tier 1 Capital Tier 2 Capital Additional Tier 1 Capital
New CAR requirement for SIBs: 11.5%
New CAR requirement for non-SIBs: 10.5%
%
China banking monitor 23
Although the total provision coverage ratio is rising for all banks except city commercial banks,
provisions for possible loan losses are seldom matching the aggressive expansion in the overdue
loan book for some small city and rural banks, pointing to a potential capital shortfall.
Source: CBRIC & BBVA Research
A diverged capital buffer distribution
among big and smaller banks
0
5
10
15
20
25
Total Largecommercial bank
Share Holdingcommercial bank
CityCommercial Bank
RuralCommercial Bank
6/2018 9/2018 12/2018 3/2019 6/2019 9/2019
%
China banking monitor 24
RISING LOAN-TO-DEPOSIT RATIO INDICATES
THAT BANKS BECOME THE DOMINANT
CHANNEL FOR CREDIT EXPANSION
CHINA PBOC WEEKLY OPEN MARKET
OPERATIONS AND ITS REACTION TO
BAOSHANG BANK EVENT
The net liquidity injection the center bank injected has more than quadrupled to RMB 430 billion in the week
immediately after the takeover of Baoshang Bank. PBoC has taken effort to inject liquidity recently to calm
nerves in the interbank market and avoiding a liquidity crisis for troubled banks.
Source: Bloomberg & BBVA Research Source: CBRIC & BBVA Research
Banks’ liquidity remained safe but is subject
to challenges of credit event
58
60
62
64
66
68
70
72
74
76
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Sep-1
3D
ec-1
3M
ar-
14
Jun-1
4S
ep-1
4D
ec-1
4M
ar-
15
Jun-1
5S
ep-1
5D
ec-1
5M
ar-
16
Jun-1
6S
ep-1
6D
ec-1
6M
ar-
17
Jun-1
7S
ep-1
7D
ec-1
7M
ar-
18
Jun-1
8S
ep-1
8D
ec-1
8M
ar-
19
Jun-1
9S
ep-1
9
Excess Reserve Ratio Loan-to-Deposit Ratio (RHS)
% %
China banking monitor 25
SOLVERNCY RISK IOOMS LARGE AMONG SOME SMALL
CITY AND RURAL COMMERCIAL BANKS
Markets saw another two banks-Bank of Jinzhou and Hengfeng Bank receive official assistance to continue
operating after government rescue of Baoshang Bank, which is the first case of a direct state takeover of a
lender in the past 20 years.
The adverse impact on economy was
amplified by the troubles in banking sector
Source: Wind & BBVA Research
2
2.2
2.4
2.6
2.8
3
3.2
3.4
3.6
02
/05
/201
9
09
/05
/201
9
16
/05
/201
9
23
/05
/201
9
30
/05
/201
9
06
/06
/201
9
13
/06
/201
9
20
/06
/201
9
27
/06
/201
9
04
/07
/201
9
11
/07
/201
9
18
/07
/201
9
25
/07
/201
9
01
/08
/201
9
08
/08
/201
9
15
/08
/201
9
22
/08
/201
9
29
/08
/201
9
05
/09
/201
9
12
/09
/201
9
19
/09
/201
9
26
/09
/201
9
03
/10
/201
9
10
/10
/201
9
17
/10
/201
9
24
/10
/201
9
31
/10
/201
9
07
/11
/201
9
14
/11
/201
9
21
/11
/201
9
SHIBOR 7 days R007 7 days DR007 days NCDs 1 month
Baoshang Bankdeclared liquidation
Bank of Jinzhouliquidity injection
Hengfeng bankrestructuring
YoY
China banking monitor 26
COMMERCIAL BANKS ISSUED
DEBT-INSTRUMENT
Source: Shanghai Clearing House & BBVA Research Source: Shanghai Clearing House & BBVA Research
Small banks’ reliance on negotiable certificates of
deposits (NCDs) as funding sources has been damaged
4.3
40.0
352.4
566.9
1,505.8
1,954.6
9,932.8
0 5,000 10,000 15,000
Hybrid capital bond
Capital instrument
Convertible debt
Subordinated debt
Financial debt
Secondary capital instrument
Negotiable certificates ofdeposit (CDs)
RMB bn
0%
2%
4%
6%
8%
10%
12%
14%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Citycommercial
banks
Joint-stockcommercial
banks
State-ownedcommercial
banks
Ruralcommercial
banks
2018 Q3 2018 Q4
2019 Q1 2019 Q2
2019 Q3 As % of banking assets
RMB bn
BALANCE OF COMMERCIAL BANKS ISSUED NCDs
BY BANKS TYPE
Small banks are facing deteriorating funding conditions. It is reported that troubled banks have been able to
secure only 20-40% of the funds they have sought to raise in the interbank market for negotiable certificates of
deposit (NCDs), a vital source of funding for many smaller lenders.
China banking monitor 27
COMMERCIAL BANKS ISSUED
BONDS BY BANK TYPE
COMMERCIAL BANKS ISSUED BONDS BY RATING
Source: Shanghai Clearing House & BBVA Research Source: Wind & BBVA Research
Small banks reliance on the bond market have also been
curtailed
After the credit events, the issuance of bonds in the primary market by city commercial banks and rural
commercial banks were significantly reduced. These banks have significantly reduced issuing bonds as funding
source and bonds issuance rating below AA+ have been diminished.
0
10
20
30
40
50
60
70
Jan Feb Mar Apr May Jun Jul Aug Sep
AAA AA+ AA A+
RMB Bn
0
10
20
30
40
50
60
Jan Feb Mar Apr May Jun Jul Aug Sep
Joint-stock commercial banks City commercial banks
Rural financial institutions Foreign banks
RMB bn
Banks interconnectedness
with the shadow banking
system has further decreased
03
Shadow banking
activities
China banking monitor 29
BREAKDOWN OF BANKS LIABILITIES
The mix of the banks’ source of market funds also improved, with bonds and negotiable certificates of
deposits rising to account for 4.1% of assets at 1H 2019 from 3.6% at the end of 2018,while the proportion of
interbank and other shorter-term market funds dropped to 11.1% from 12.1% in the same period.
Source: Haver & BBVA Research
Banks’ fund dependence of shadow banking
system has further decreased
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
17 Q3 17 Q4 18 Q1 18 Q2 18 Q3 18 Q4 19 Q1 19 Q2 19 Q3
National fin Inst/Households Liabilities to Central Bank NCDs Oth Financial Corps(exclue NCDs)
Foreign Liabilities Bond Issue Paid-in Capital Other Liabilities
China banking monitor 30
SHADOW BANKING ASSETS AS % OF GDP
DECLINED FURTHER AT THE END OF 2018
INTENSIFIED REGULATIONS HAVE A GROWING
IMPACT ACROSS SHADOW BANKING SECTOR
The broad shadow banking assets declined at RMB 57.4 trillion in 1H 2019. Major
components of shadow banking including WMPs, trust loans, entrusted loan and bank
acceptance all dipped to their slowest pace over the past eleven quarters.
Source: CBRIC, China Banking Wealth Management Product Registration
& Depository Center & BBVA Research Source: CBIRC & BBVA Research
Financial deleveraging has seen good progress
0
10
20
30
40
50
60
70
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19 1
H
WMPs outstanding Trust Company asset Entrust loans
Bank acceptance Private lending Others
RMB trillion
0
10
20
30
40
50
60
70
80
90
100
0
50
100
150
200
250
300
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
1H
RMB,tn
Shadow banking Bank loans
Bank asset Shadow banking as % of GDP
As % of GDP
China banking monitor 31
NON-PRINCIPAL PROTECTED WMPS
OUTSTANDING MARGINALLY DECLINED
INTERBANK INVESTORS’ EXPOSURE TO
SHADOW BANKING HAS SHRUNK FURTHER
Non-principal protected WMPs distributed by banks have shrank to RMB22.18 trillion at the end of 1H
2019.Both amount and percentage of WMPs held by interbank investors declined. We expect a marginal
relaxation in the implementation of the asset management regulation this year as policy priorities are
shifting away from combating leverage towards sustaining growth.
Source: Wind & BBVA Research Source: Wind & BBVA Research
Coordinated regulatory actions help
to curb WMPs growth
0
2
4
6
8
10
12
14
16
18
20
0
5
10
15
20
25
30
35
2014 2015 2016 2017 2018 2019 1H
Non-principal protected Principal protected
% of deposits (RHS)
RMB trillion
0
5
10
15
20
25
0
1
2
3
4
5
6
7
8
2016 2017 2018 2019 1H
WMPs held by interbank investors
As % of total WMPs (RHS)
RMB trillion %
China banking monitor 32
THE SHARE OF SHORT TERM WMPS
REMAINED STABLE
WMPS SHIFTED TO
BOND-LINKED PRODUCTS
WMPs with short maturities (below 3 months) are relatively steadily with their share
around 40%, helping reduce liquidity risk from a maturity mismatch between WMPs
and underlying assets. WMPs shifted to bond-liked products.
Source: CEIC, Haver & BBVA Research Source: CEIC & BBVA Research
Maturity mismatch between WMPs
and underlying assets has lessened
55.9%
17.0%
9.3%
5.7%
5.6% 3.4% 3.1%
Bonds Non-standard debts assets
Equity Interbank borrowing
Cash and bank deposits Mutual fund
Others
0
20
40
60
80
0
5000
10000
15000
20000
Se
p-1
4
Ja
n-1
5
Ma
y-1
5
Se
p-1
5
Ja
n-1
6
Ma
y-1
6
Se
p-1
6
Ja
n-1
7
Ma
y-1
7
Se
p-1
7
Ja
n-1
8
Ma
y-1
8
Se
p-1
8
Ja
n-1
9
Ma
y-1
9
Se
p-1
9
Units
NA2 Years or above1-2 Years3-12 Months1-90 DaysShare of 1-90 Days WMPs as % of total (RHS)
China banking monitor 33
GROWTH IN TRUST COMPANY LOANS
Growth of outstanding trusts loans continued its upward trend in Q3 2019 amid a cooling economy,
which also reflected the recent relaxation of regulation. We expect this trend will continue in the rest of
the year.
Source: China Trustee Association & BBVA Research
Trust loans resume to grow in Q3 2019
amid a cooling economy
0
1
2
3
4
5
6
7
8
0
1
2
3
4
5
6
7
8
9
20
13Q
2
20
13Q
4
20
14Q
2
20
14Q
4
20
15Q
2
20
15Q
4
20
16Q
2
20
16Q
4
20
17Q
2
20
17Q
4
20
18Q
2
20
18Q
4
20
19Q
2
Loans made by Trusts(LHS) Trust loan as % of bank loan(RHS)
RMB trillion %
China banking monitor 34
INFRASTRUCTURE AND REAL ESTATE SEEK TO TRUST ASSETS FOR FINANCING
Many investors in infrastructure sectors and real estate seek financing through trust assets as they are
facing refinancing risk amid the funding shortage. The latest tightening in funding might drive a fresh
round of consolidation among property developers.
Source: China Trustee Association & BBVA Research Source: China Trustee Association & BBVA Research
Trust assets continue to shift toward
property sector and business enterprises
14.59%
14.18%
2.79%
1.30%7.50%
15.99%
29.90%
13.74%
Infrastructure Real estate Securities market (Stock) Securities market (Fund)
Securities markets (Bond) Financial institutions Business enterprise Other
14.59%
14.18%
2.79%
1.30%7.50%
15.99%
29.90%
13.74%15.19%
15.38%
2.72%
1.24%
6.50%
14.96%
29.46%
14.54%
2019 Q2 2018 Q4
China banking monitor 35
Default risks are rising for trust projects at the end of 1H 2019 (RMB 347.4 billion),with the yoy growth
amounting to 81.6% in the first half year. This will accelerate amid a cooling economy as most of its borrowers
are highly leveraged. But the risks are still manageable given their small size (less than 1% of total trust assets).
Source: China Trustee Association & BBVA Research
Trust asset quality deteriorated rapidly
amid a cooling economy
-20%
0%
20%
40%
60%
80%
100%
0
50
100
150
200
250
300
350
400
2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2
Outstanding risky trust projects Growth rate(RHS)
RMB trillion %
China banking monitor 36
P2P lending has attracted more stringent regulatory oversight for its high default rates due to weak risk
management and fraud. However, the continuous increase in “troubled” P2P platforms has not posed as a
significant systemic risk given the industry’s relatively smaller size (around 2% of broad shadow banking assets).
Source: Wind & BBVA Research
P2P lending growth halved with declining
number of operating platforms
0
200
400
600
800
1000
1200
1400
1600
1800
2000
0
1000
2000
3000
4000
5000
6000
7000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Oct
Operating P2P platforms Toubled P2P platforms* Outstanding P2P loans
RMB billionUnits
37 China banking monitor
Source: Moody & BBVA Research
Regulatory measures to curb shadow
banking activities
Date Key Regulatory Developments
Mar-17Combating market chaos, focusing on strict supervision of inter-bank arbitrage activities,e.g. interbank financing, interbank deposits
and outsourcing
Apr-17 Improve the ability and level of the banking system to serve the real economy and avoid idling funds
Apr-17Strengthen the requirements for risk prevention and risk control in the banking industry, clarify the key areas of risk supervision; limit the scale of
inter-bank financing, and intergrate inter-bank businesses into liquidity regulation
Dec-17Clearly define the bond holding business, the level of bond leverage, etc., implement unified supervision of the bond market business, and
gradually de-leverag
Jan-18Clarify the regulatory standards for large-scale risk exposure of commercial banks, further standardize interbank business, guide banks to focus
on their main business
Jan-18It is make clear that commercial banks, as trustees, may not participate in loan decisions, prohibit the use of funds raised from asset
management products to issue entrusted loans, and restrict channels for non-standard investment in asset management products.
Apr-18
Fully standardize the asset management business of financial institutions: clarify the classification standards for asset management products;
distinguish the on- and off-balance sheet, break the rigid redemption; control the leverage level; suppress multi-layer nested and non-standard
business, etc.
Jun-18
PBOC and CSRC jointly publish rules to limit same-day withdrawal amount from one single MMF at RMB 10,000 per investor with a one-month
transition period before full implementation.Only qualified commercial banks are allowed to provide advances for the instant redemption of
withdrawals.
Jul-18
CBIRC releases new draft rules to strenthen supervision of commercial banks' WMP business.The draft rules allow product valuation on an
amortized cost basis for qualified closed-end WMPs, and lower the minimum subscription amount for single publicly offered WMP to RMB
10,000 from previous RMB50,000.The transition period will last until the end of 2020,in line with the finalized regulation for banks' and NBFIs'
asset management businesses released in April.PBOC issues asset management implementation guidelines.The regulator will adjust related
MPS parameters and encourage banks to raise tier 2 capital to facilitate the transfer of qualified non-standard debt assets back to banks'
balance sheets.
38 China banking monitor
Source: Moody & BBVA Research
Regulatory measures to curb shadow
banking activities
Date Key Regulatory Developments
Aug-18
CBIRC issues a statement (Document 76) to ask banks and insurers to meet reasonable demand for financing from LGFVs and avoid disruption to ongoing
infrastructure projects, as long as it will not increase local government debt.CBIRC issues a statement (Document 37) and clarifies that trust companies
can carry out qualified channel business to support the real economy. The financial regulators announce 10 measures to address risks related to P2P
lending platforms. The measures clarify the responsibilities of P2P platforms and their shareholders, stipulate the conditions for orderly liquidation of failed
platforms, outline penalties for borrowers that escape their debt obligations and prohibit registration of new platforms.
Sep-18
CBIRC publishes the finalized regulation on commercial banks' WMP business after a two-month public consultation.The finalized regulations maintain a
minimum 90-day tenor requirement for all closed-end WMPs as proposed in the draft rules, and also allow WMPs to indirectly invest in the stock market
through mutual funds
Oct-18
CBIRC publishes the draft regulations on commercial banks' wealth management business unit for public comment. The regulations will split off wealth
management units from the parent banks, and allow those units to sell publicly-offered wealth management products without a minimum subscription
amount. Wealth management business unit allows a wider scope of products to be developed and to suit the needs of customers. A "fire-wall" will be
developed between the bank and the wealth management unit. It will also facilitate to break implicit guarantees of banks' wealth management business.
Dec-18CBIRC publishes the finalized regulations on commercial banks' wealth management business unit. The finalized regulation requires that wealth
management business units cannot invest more than 205 of their own funds into wealth management products issued by the parent banks.
Jan-19The Office of the Leading Group for the Special Campaign against Internet Financial Risks and the Office of the Leading Group for the Special Campaign
against Peer-to-peer Lending Risks jointly release new guideline to facilitate an orderly liquidation of failed platforms in the P2P industry.
Feb-19 PBOC launches the first time issuance of central bank bills swap (CBS),which aims to support eligible banks' isssuance of perpetual bonds.
Jun-19 The National Development and Reform Commission tightened trust loan for property developers,it stupilate that proceeds from offshore note issuances
should be used to repay existing debt instead of investing in domestic property projects and replenishing working capital.
Jul-19
CBIRC and CSRC jointly issue the Guidelines on Commercial Banks’ Issuance of Preferred Stock for Tier-1 Capital Replenishment (Revised) to relax
capital replenishment rules for unlisted banks.The new guidance on banks' preferred shares removed a prerequisite for banks to publicly sell shares on the
over-the-counter market before they can sell preferred shars to raise capital,which was an obstacle for some banks in the past.
Sep-19
MOF revised financial regulations for financial enterprises (Draft for Soliciting Opinions).The basis standared for the provison coverage ratio required by the
regulatory authority is 150%.For banks whose provision coverage raito exceeds the requlatory requirements by more than 2 times,it should be deemed as
a tendency to hide profits,and the excess provision should be regarded as undistributed profit.
39 China banking monitor
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date of issue of the report, prepared by BBVA or obtained from or based on sources we consider to be reliable, and have not been independently verified by BBVA.
Therefore, BBVA offers no warranty, either express or implicit, regarding its accuracy, integrity or correctness.
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40 China banking monitor
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Chief Economist
Le Xia
Olga Isabel Cerqueira De Gouveia
Betty Huang
