China's banks face their 'Japanification moment', S&P report warns

Core Viewpoint - China's banks are approaching a "Japanification moment," characterized by prolonged low growth and weak profitability, similar to Japan's economic state post-1990s asset bubble burst [1] Group 1: Profitability and Economic Conditions - Years of yielding margins to support the economy have left China's banking system thin on profitability and more exposed to credit shocks [1] - The central bank prioritizes safeguarding growth and social stability over bank profits, leading to historic lows in prime loan rates, further squeezing bank profitability [3] Group 2: Lending Practices and Market Conditions - Chinese banks are directed to lend to weak borrowers and offer concessions, including fee reductions for small businesses and lower charges on consumer products [4] - Geopolitical tensions have discouraged banks from expanding into some foreign markets, complicating their growth strategies [4] Group 3: Net Interest Margin (NIM) Projections - S&P projects China's NIM to settle at 1.27% by 2027, down from 1.52% in 2024, assuming GDP growth stabilizes by then [6] - International expansion could slow the decline in NIM but may lead to higher credit losses in the future [5] Group 4: Market Reactions and Bond Yields - Chinese bank stocks have rallied since 2023, driven by declining government bond yields, prompting investors to seek better returns in bank stocks, which are viewed as stable with generous dividends [6] - Ten-year Chinese government bond yields fell to a record low of 1.64% in June 2023, before climbing back to 1.9% [7]