December 08, 2023 (MLN): Stress from China’s commercial real estate and local government sectors has been pressuring the asset quality of foreign banks, which made up 1.3% of system assets in China as of end-1H23, according to Fitch Ratings.
Though foreign banks generally align their risk management and provisioning policies with those of their parents, most of the impairment relating to mainland China-linked exposure has thus far been booked at the parent banks.
Furthermore, the banks have always maintained higher capital ratios than domestic banks in China, in part due to their differentiated strategies that also lead to different risk profiles.
A large portion of referral business is typically booked offshore and thus does not reside on the onshore-incorporated foreign banks’ balance sheets.
Changes over the past decade have reduced the regulatory burden and entry barriers for foreign banks, but most still face hurdles, such as license requirements and cross-border capital flow limitations.
The entity believes the banks’ performance and prospects remain highly sensitive to changes in China’s regulatory environment and that the ratings of Fitch-rated foreign banks in China will remain driven by our expectation of shareholder support.
