China banking monitor

Summary

Asset quality deteriorated as a slowing economy continues to weigh on lenders. Banks' profits are suffering pressure on narrowing net interest margin, lower pricing capability, and rising provisions. Although the interconnectedness between banking and the shadow banking system has increased, the room for upside is limited.

Key points

• Key points:
• Credit growth stabilized in October, reflecting policymakers are gradually pulling back from the stimulus measures enacted amid the Covid-19 pandemic.
• Bank assets growth accelerated to 10.7% in the first three quarters of 2020, amid authorities’ call to lend to the pandemic-hit economy.
• Upward pressure on non-performing loans are expanding, banks’ profits are suffering pressure on rising provisions to guard against potential losses.
• 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' interconnectedness with the shadow banking system has increased moderately, as smaller banks try to improve loan yields by funding non-bank financial institutions in a lower interest rate environment.

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