Can Chinese banks expand their loan portfolio while maintaining loan quality and profitability post-global financial crisis?

Abstract

Purpose This study aims to investigate the relationships between loan growth, loan losses and net income after the 2008 global financial crisis. This study further conducts a comparative analysis by considering the period of COVID-19. Design/methodology/approach This study uses panel data models such as one-step system GMM, random effects, fixed effects and OLS, with a data set of 131 Chinese commercial banks from 2009 to 2020. Findings The study finds no significant relationship between loan growth and future loan losses. However, after adjusting loan loss by net interest income (NII-adjusted loan loss), the study reveals that loan growth in the subsequent year decreases if NII-adjusted loan loss increases. The study also demonstrates the positive effect of loan growth on net income as newly expanded loans are funded at similar costs but offered at a lower rate compared with existing loans. During COVID-19, loan growth and net income were higher than in previous years. Originality/value The findings suggest that Chinese banks can increase lending to support the economy without sacrificing loan quality, emphasizing the importance of maintaining and enhancing credit policies and practices. Chinese banks should also continue to refine their pricing strategies for loans and deposits. The findings also imply that China's policy responses to the impact of COVID-19 could serve as lessons for future policy decisions.