Most big Chinese banks improved their liquidity buffers in the third quarter of 2023, helped by an increase in deposits as investors sought to park their surplus funds with banks as they wait for new opportunities.

Bank of Ningbo Co. Ltd. led the way in the quarter, with a 84-percentage-point increase year over year to a Basel III liquidity coverage ratio (LCR) of 266.08%, S&P Global Market Intelligence data shows. Chongqing Rural Commercial Bank Co. Ltd. posted the region's highest ratio, at 342.56%, following 66-percentage-point increase year over year — the second-best ratio change in the period.

In contrast, Bank of Nanjing Co. Ltd. recorded the worst LCR drop, falling 98 percentage points to 178.87%, the data shows, while Ping An Bank Co. Ltd. had the lowest ratio, at 101.25%, after a 4-percentage-point drop over the period.

Across Asia-Pacific, 35 out of 56 lenders in a Market Intelligence ranking saw their LCRs rise year over year, including at most of the 26 mainland Chinese banks. The ranking covered lenders with assets greater than $100 billion that reported their ratios as of Sept. 30.

Average LCR represents high-quality liquid assets as a percentage of average net cash outflows over a 30-day period, as defined by local regulatory requirements and as reported by the company. A high LCR is an indication that a bank has enough high-quality liquid assets to cover its expected cash outflows over the next 30 calendar days. As per Basel III requirements, banks must have a minimum ratio of 100%.

Creating cushion

The improvement in Chinese banks' LCRs can be attributed to rapid deposit growth, especially from households amid relatively weak economic confidence, which led to increased savings and weakness in loan demand, according to Ming Tan, an analyst at S&P Global Ratings. The household share of total yuan-denominated deposits increased to 48% from 39% between 2017 and the first half of 2023, according to a S&P Global Ratings report.

Depositors in mainland China parked 25.65 trillion yuan with banks in the January-to-November period, an increase of 130.10 billion yuan over the amount deposited in the same period of 2022, according to National Administration of Financial Regulation data.

LCRs of listed Chinese banks suggest most have ample liquidity buffers, with smaller city and rural lenders seemingly enjoying greater liquidity cushions, mitigating their weaker access to wholesale funding, Ratings noted. It also expects new capital rules to ease the strain on Chinese banks' capital buffers amid declining profitability.

China's National Administration of Financial Regulation, the new umbrella regulator for the financial sector, on Nov. 1 published the final version of its Capital Management Rules for Commercial Banks, which will come into effect Jan. 1, 2024. The new rules are an effort to bring the country's banking system further in line with the latest international standards on capital requirements set by the Basel Committee on Banking Supervision.

Chinese banks keep more cash and government securities on hand amid tepid demand for loans, particularly for individual loans, Shujin Chen, economist and head of China financial and property research at Jefferies, said in an emailed comment.

Mixed trend

The average ratios of large Indian banks showed a mixed trend, with four of the total eight Indian banks that made the list clocking LCR gains.

The capitalization and earnings of Indian banks has strengthened in recent years, and the country's financial institutions, especially public-sector banks, are expected to sustain their improvement in capital positions, according to Deepali V. Seth Chhabria, an analyst at S&P Global Ratings. Top tier private sector banks have strong capitalization and have demonstrated good capability to raise capital periodically.

Australia's Macquarie Bank Ltd. also recorded an improvement in its liquidity coverage ratio, logging a 29-percentage-point improvement over the period to 199%. Japanese banks also clocked a mixed trend in their ratios in the quarter, with only the four Japanese megabanks seeing moderate improvements in their LCRs. S&P Global Ratings expects Japan's banks should remain resilient to uncertainties in domestic and global economies.

Singapore's DBS Group Holdings Ltd., United Overseas Bank Ltd. and Oversea-Chinese Banking Corp. Ltd. also saw their LCRs rise during the period.

– Click here to download a spreadsheet with data featured in this story. – Click here to read our recent story on common equity tier 1 capital ratio of the largest Asia-Pacific banks in the quarter ended Sept. 30, 2023.