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Fitch: Lower Growth Appetite and Optimized Regulatory Framework Support Resilience of Chinese Banks
2026-09-04 16:46:24 Fitch Ratings said that a more moderate growth appetite, controllable risk exposure, more standardized real estate financing management, and continuous optimization of the regulatory framework jointly support the resilience of Fitch-rated Chinese banks, especially large banks. Slower credit expansion should help curb systemic risks and stabilize system leverage in the medium term. In addition, declining shadow banking risks, improved transparency, and stronger regulatory effectiveness over the past decade have enhanced the through-the-cycle resilience of Chinese banks, positively affecting Fitch's assignment of a "bbb-"/stable operating environment score and viability ratings for China's banking sector. Fitch expects loan growth between 2026 and 2028 to broadly align with nominal GDP growth at an annual average of about 5%, supporting stable leverage ratios for the banking system in the medium term. In 1H26, YoY growth in outstanding banking sector loans slowed to 5%, versus 7% during 2024-2025, compared with double-digit growth before 2023. During the current economic downturn cycle, regulators have not introduced large-scale credit stimulus measures. At the same time, structural improvements in the banking sector have continued alongside declining shadow banking risks, improved transparency, ongoing optimization of the regulatory framework, and accelerated risk resolution for unrated small banks. These developments, including the latest package of real estate policies, indicate that policy focus has shifted toward curbing excessive lending and controlling systemic risks. These ongoing structural improvements create upside potential for the operating environment score. Earlier-than-expected stabilization in NIM and profitability, along with stable asset quality and capital levels, also demonstrate the resilience of Fitch-rated Chinese banks. Although banks' NIM had continued to narrow over the past five years, it began stabilizing and recovering in 1H26 due to fewer interest rate cuts and lower deposit costs. Meanwhile, non-interest income maintained steady growth, driving YoY increases of 7.5% and 2.5% in operating income and net profit respectively for Fitch-rated Chinese banks. In addition, relatively resilient China GDP growth and easing deflationary pressures prompted Fitch to revise the sector outlook for Chinese banks from "deteriorating" to "neutral" in June 2026. Asset quality risks remain in the property development sector and unsecured retail lending segment, but overall asset quality performance of most Fitch-rated banks remains stable. In 1H26, the non-performing loan ratio for property development loans at Fitch-rated Chinese banks remained stable at 4.4%, while the non-performing loan ratio for unsecured retail loans edged up to 2.4% from 2.2% at end-2025. Although disclosed indicators may not fully reflect potential risks, proactive bad loan disposals and manageable risk exposure have partly mitigated related risks. As of the end of 1H26, corporate real estate loans and unsecured retail loans accounted for 4% and 7% respectively of total loans at Fitch-rated banks. Newly introduced policy measures should also help limit downside risks in these areas. Tighter controls on real estate lending and measures supporting project delivery should help strengthen credit standards and risk controls for property development loans. In addition, reasonable loan-to-value ratios and moderate household leverage should reduce the risk of widespread deterioration in household debt servicing ability. As of the end of 1H26, the average loan-to-value ratio for residential mortgages was 60%, while household debt as a proportion of disposable income declined to 92% from 102% at end-2021. Meanwhile, continued declines in shadow banking exposure and improved transparency indicate a more moderate risk appetite among banks, which should help support intrinsic asset quality in the medium term. During the current economic downturn cycle, Fitch-rated large banks have demonstrated stronger earnings and asset quality stability. Fitch expects the resilience of these large banks to continue strengthening during industry consolidation, supported by leading market positions, diversified business and geographic layouts, more prudent asset-liability management, and close government ties where applicable. Unrated small banks face relatively higher risks, particularly those located in regions with weaker household debt servicing ability and high housing inventory. However, accelerated risk resolution for small banks and targeted regulatory intervention should help reduce tail risks and maintain overall financial stability. (ad/u)~ AASTOCKS Financial News Website: www.aastocks.com This article was automatically translated by AI, the Chinese version should be considered the authoritative version. AASTOCKS.com Limited does not guarantee its accuracy or completeness and accepts no liability for any damages or losses arising from the use of this translation. | |