Banks may see new NPL formation, whilst credit costs are projected to stay high.

The 2021 outlook for Chinese financial institutions is negative as banks, asset managers, and leasing companies continue to face significant pressure and risks in the coming year, reports Moody’s Investors Service.

Specifically, Chinese banks will remain at risk of new non-performing loan (NPL) formation, with their credit costs staying high and in turn weakening their profitability and capacity to generate capital.

"Although we project China's economy to gradually recover and grow by 7% next year, Chinese financial institutions still face significant economic and policy risks going in 2021," said Nicholas Zhu, a Moody's vice president and senior credit officer. "These risks broadly stem from an uneven economic recovery, unwinding policy support and accelerating pace of digitalization in financial services."

Although distressed asset management companies will have more business opportunities in this climate, they will find it harder to dispose of distressed assets, which will pressure their asset risk and profitability, Moody’s noted.

Chinese leasing companies will also face challenges, particularly as their offshore aircraft leasing portfolios remaining under pressure by the continued paralysis in global aviation traffic.

On the other hand, the outlooks for Chinese securities and insurance companies are stable.

Ample liquidity and low leverage will continue to support Chinese securities firms, according to Moody’s. Meanwhile, strong capitalization and rebounding investment yields underpin the stable outlook on insurers.

In particular, the upcoming implementation of the C-ROSS phase II capital regime will reportedly promote insurers' capital-strengthening measures and issuance of capital securities.