Naoko Nemoto, MD, financial institutions ratings, Standard & Poor’s, believes Chinese banks are not likely to face the crisis Japanese banks faced in the 1990s; profitability to remain high.
April 15, 2014 | Naoko NemotoJapan's last banking crisis could offer a cautionary tale for Chinese banks. The similarities are striking. China is currently grappling with soaring public sector debt, rapid credit expansion, and steep property prices at a time when the economy is slowing down. In the early 1990s, Japan's comparable problems destabilized its banks and triggered economic stagnation for a so-called "lost decade." Are China and its banks following in these footsteps?
We don't believe Chinese banks are likely to face a prolonged crisis that Japanese banks underwent in the 1990s. There are four key differences to Japan that we believe will help China's banks absorb credit losses and reduce the risk of systemic difficulties.
First, credit growth is slowing down in China. Unlike Japan which experienced accelerated leverage for a decade, private-sector leverage is already moderating in China. Loans from unregulated entities in Japan rapidly expanded during the 1980s, underscoring high leverage in the private sector. The ratio of loans channeled through nonbank sectors compared with total loans for depositary institutions peaked at 34% in 1990.
In China, loan growth soared in 2009-2010 to counterbalance the fallout from the global financial crisis, exacerbating the credit risks. But the pace of loan growth has slowed since 2011 because the central government has been sufficiently concerned to take steps to address the binge, such as allocating new loan quotas to the banks. We expect indebtedness in corporate China to continue to decelerate over the next two to three years.
Second, credit losses are likely to be absorbable given Chinese major banks’ solid earnings and capitalization. Conversely, in 1990, Japanese banks had to absorb large credit costs with weak capitalization and earnings. And that led to significant shortfalls in capital. The average ROA of all the banks in the 1990s was 0.2% and the average tier-1 r...
Categories:
China, Credit Risk, Japan, Risk and RegulationKeywords:Capital Shortfall, GDP, Credit Bubble, ROA, Systemic Risk
