Large Chinese banks' strong CET1 ratios show resilience to potential stresses

Major Chinese banks maintained strong common equity Tier 1 ratios in the first quarter, indicating they can withstand financial distress.

At least 17 Chinese banks, including the four largest, had common equity Tier 1 (CET1) ratios above 8% in the January-to-March quarter, according to S&P Global Market Intelligence data. Chinese banks must have at least 5% core Tier 1 and 6% Tier 1 ratios, as well as 8% total capital ratio, according to the China Banking and Insurance Regulatory Commission (CBIRC).

"Chinese banks generally, except for a few small lenders, are well positioned for stresses of the type the US banks are currently experiencing, given their capital base and asset quality," Chief Greater China Economist Bruce Pang of Jones Lang LaSalle said, adding that Chinese lenders' strong capital and provisions minimize risks.

Worldwide financial institutions have been scrutinized after the recent collapse of three banks in the US and the rescue of Credit Suisse AG by its bigger rival, UBS Group AG. Credit Suisse was not only Switzerland's second largest bank, but also one of the 30 global systemically important banks (G-SIBs). Despite their relatively bigger sizes, Chinese banks have limited overseas exposure and have stable asset quality.

Big four

Industrial and Commercial Bank of China Ltd., the world's largest lender by assets, had a 13.7% CET1 ratio in the first quarter, up 27 basis points from the prior-year quarter. China Merchants Bank Co. Ltd. had 13.41% and China Construction Bank Corp. had 13.19%, data showed.

Industrial and Commercial Bank of China and China Construction Bank are G-SIBs, requiring 1.5 percentage points more capital, according to the Basel, Switzerland-based Financial Stability Board. Together with Agricultural Bank of China Ltd. and Bank of China Ltd., they make up China's so-called big four lenders. These large banks maintain high CET1 ratios to lend if needed, Pang noted.

China is targeting economic growth of about 5% in 2023, after missing a 5.5% target in 2022. The country's GDP growth was 3% in 2022, the lowest since 1976, excluding the 2.2% GDP growth recorded in 2020, according to the World Bank.

Chinese commercial banks had 15.17% aggregate capital, 12.30% Tier 1 capital and 10.74% CET1 ratios at the end of 2022, according to data from the CBIRC.

Global exposure

While Chinese banks have little direct global exposure, significant global market disruptions could still indirectly affect them, Michelle Brennan, managing director of financial services methodologies at S&P Global Ratings, said at a May 10 webinar.

"So what we are hearing is only there is increased scrutiny on any similar risks that the banks in the [Asia-Pacific] region might be facing," Brennan said, adding that scrutiny from regulators and banks' own risk committees would likely tighten risk standards.

Chinese regulators recommended new risk-weighted asset categories and tighter capital requirements for banks, according to the CBIRC.

Though the new weightings match Basel requirements, "these rule changes add to the challenges facing Chinese G-SIBs in Total Loss Absorbing Capital conformance," S&P Global Ratings credit analyst Michael Huang said.