SINGAPORE (S&P Global Ratings) April 19, 2022--Shanghai's COVID lockdown--China's most extensive in two years--could hit banks with a high concentration in the country's financial capital. These include Shanghai Rural Commercial Bank Co. Ltd. (SRCB; BBB/Stable/A-2) and Bank of Shanghai Co. Ltd. (BoSH; not rated). S&P Global Ratings believes the COVID restrictions will hurt micro and small enterprises more severely, affecting those that lend to such entities.
Firms in manufacturing and hospitality will also be vulnerable--particularly the smaller entities. High commodity prices, operational disruptions, and an inability to pass on prices are squeezing such enterprises. Almost all of SRCB's loans are in Shanghai, with a focus on small and midsize enterprises (SMEs) and rural communities. The city accounts for more than 40% of BoSH's loan book.
"The resilience of some Chinese banks could be tested the longer the duration of the COVID restrictions," said S&P Global Ratings credit analyst Ming Tan.
Moratorium and SME-supportive lending policies will likely limit any immediate impact on nonperforming loan (NPL) formation and provisioning requirements, as well as hits to earnings and capitalization.
China's property deleveraging campaign could also add to the stress that these banks face. Adequate collateral coverage of real estate loans will limit the credit losses arising from these loans. Real estate loans accounted for 20% of SRCB's loan book as of end-2020 and about 15% of BoSH's as of June 30, 2021.
While SCRB has higher concentration risk than BoSH, SRCB also had stronger financial buffers entering the lockdown than BoSH. As of Sept. 30, 2021, SRCB had a solid capital adequacy ratio (CAR) of 15.7%, and low NPL and special mention loan (SML) ratios of 0.9% and 0.7%, respectively. Its NPL coverage ratio is high, at 465%. These metrics are much better than the average for rural commercial banks in China.
BoSH's NPL and SML ratios of 1.2% and 1.7%, respectively, and its NPL coverage of 332% were also better than the average for Chinese city commercial banks. Its CAR of 12.4% was below average, however.
SRCB benefits from a moderately high likelihood of support from the Shanghai government, given the bank's important and unique role in financing SMEs and the rural community in Shanghai. We do not rate BoSH, but we note that it is a systemically important bank in China.
"The effect of Shanghai's lockdown on China's broader financial system is manageable," said Mr. Tan. The city accounted for about 5% of loans in China as of end-2021, and its commercial banking sector NPL ratio was 0.73%. Shanghai had also managed the first wave of COVID reasonably well, keeping its banking sector NPL ratio at 0.79% at the end of 2020.
Nevertheless, some larger banks with higher geographic concentration could also be affected if the extensive lockdown spreads from the financial capital. Exposed banks may include China Zheshang Bank Co. Ltd. (CZB: BBB-/Stable/A-3) and Shanghai Pudong Development Bank Co. Ltd. (SPDB: BBB/Stable/A-2).
The Yangtze River Delta region, which is socioeconomically integrated with Shanghai, accounted for about 54% of the loan book at CZB and 32% at SPDB. The average was about 26% for the mega and joint-stock banks. CZB and SPDB also had a slightly higher NPL ratio and a lower NPL coverage ratio than the average for joint-stock banks.
Editor: Jasper Moiseiwitsch
This report does not constitute a rating action.
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| Primary Credit Analyst: | Ming Tan, CFA, Singapore + 65 6216 1095; ming.tan@spglobal.com |
| Secondary Contacts: | Harry Hu, CFA, Hong Kong + 852 2533 3571; harry.hu@spglobal.com |
| Michael Huang, Hong Kong + 852 25333541; michael.huang@spglobal.com |
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