With COVID-19 seemingly somewhat under control in China, the country’s banking industry is examining the damage and preparing for difficulties. In particular, the aftermath of the crisis is expected to test lenders’ resilience with a more than 50% increase in non-performing assets at the same time as a halving in China’s GDP growth. S&P Global Ratings has predicted that this will ultimately result in an exaggerated pecking order for Chinese financial institutions, with the biggest coming out stronger and smaller, regional ones (i.e. those with the highest exposure to the hard-hit small enterprises) either in a much weaker position or failed. To get a sense of how a particular Chinese financial institution is likely to fare in a post-COVID-19 world, there are 3 important things to consider:
- Location – is it located (or predominantly operating) in an area significantly negatively impacted by COVID-19 and/or the measures taken to combat its spread?
- Exposure level to small enterprises – is the bulk of its business aimed at small enterprises?
- Exposure level to the hardest-hit industries – is the bulk of its business aimed at the hardest-hit industries?
Affirmative answers to one or more of these questions are likely to mean that the financial institution will probably face a difficult period and be in a significantly weaker position when the COVID-19 dust has settled. At the same time, it remains to be seen what the final fallout will be, especially as the government is active in giving financial institutions significant leeway to keep the level of non-performing loans down and businesses functioning.