Chinese banks are set for further bolstering of their capital cushions as the government plans to inject billions of dollars into big banks to support growth in the world's second-largest economy.

For the lenders, the move means these cushions will improve, boosting them even further above minimum regulatory requirements.

Li Yunze, head of China's National Financial Regulatory Administration (NFRA), announced Sept. 24 that the country will increase the core Tier 1 capital at six large commercial banks. The lenders were not named. The announcement comes amid various government measures, including interest rate cuts, to prop up economic growth as it seeks to achieve its 2024 GDP growth target of 5.0%. As part of the latest stimulus measures, the People's Bank of China cut the reserve requirement ratio for banks by 50 basis points and reduced several key interest rates.

The government is considering injecting up to 1 trillion yuan of capital into the banks, Bloomberg News reported, citing sources.

"China will recapitalize the banks to prompt them to extend more loans and to prevent them from falling into trouble [in terms of] nonperforming loans," said Takahide Kiuchi, executive economist at Nomura Research Institute. Increasing their capital would "improve their buffers" to better handle stress, Kiuchi said.

China's six largest banks — Industrial and Commercial Bank of China Ltd., Agricultural Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd., Bank of Communications Co. Ltd. and Postal Savings Bank of China Co. Ltd. — posted buffers above minimum regulatory requirements as of June 30, after improving their common equity Tier 1 (CET1) capital ratios, S&P Global Market Intelligence data shows.

Of those six, Postal Savings Bank of China was the only one without a year-over-year improvement in the CET1 ratio. All six lenders reported CET1 ratios well in excess of the applicable minimum regulatory requirements, an indication of healthy capital cushions and their ability to handle adverse stress scenarios. The CET1 ratio at ICBC, for instance, rose to 13.84% as of June 30 from 13.20% a year ago — well above the regulatory requirement of 9.00%.

A bank's CET1 ratio indicates how well it can withstand stress. The ratio measures the proportion of most-liquid capital that banks hold against their risk-weighted assets, in which the value of their loan portfolios and other assets such as bonds are adjusted for credit and market risks. An increase in a bank's risk-weighted assets pushes its CET1 ratio down.

China could issue special government bonds to fund its capital injection into banks before the end of October, said Yusuke Miura, a senior economist at NLI Research Institute who covers the Chinese economy. "If so, that would help in supporting their CET1 ratios," Miura said.

CET1 winners and losers

The majority of the 43 Asia-Pacific banks with assets of more than $300 billion logged improvements in their CET1 ratios year over year, with Japan's Mitsubishi UFJ Financial Group Inc. (MUFG) posting the largest gain, at 2.51%, according to Market Intelligence data. The Japanese megabank's ratio clocked in at 13.40% as of June 30, compared to 10.88% a year ago.

In releasing its midterm plans in May, MUFG said to raise its CET1 ratio by the fiscal year ending in March 2027, it wanted to increase high-profitability risk-weighted assets by ￥12 trillion worth and shed ￥5 trillion worth of low-profitability assets.

Sumitomo Mitsui Financial Group Inc., another Japanese megabank, showed the steepest CET1 decline year over year, to 12.81% from 14.34% a year ago, the data shows. Nomura Holdings Inc.'s ratio fell 1.05 percentage points to 15.60% as of June 30, while Japan Post Bank Co. Ltd. and South Korea's KB Kookmin Bank each saw a 0.56-percentage-point decline in their ratios.

India's HDFC Bank Ltd., Standard Chartered Bank (Hong Kong) Ltd. and Singapore's Oversea-Chinese Banking Corp. Ltd. maintained the largest capital buffers in excess of minimum regulatory requirements among the pack, according to Market Intelligence data. HDFC Bank's CET1 ratio was 16.72% as of June 30, representing a capital buffer of 8.52% above the minimum required 8.20%, while Standard Chartered Bank (Hong Kong) maintained a capital buffer of 7.06% as of June 30.