S&P Says China's Banks Face Growing Risk From Bad Debt
September 21 2015 - 8:45AM
Dow Jones News
By Mark Magnier
BEIJING--In the latest sign of headwinds hitting the Chinese
economy, a U.S. ratings firm said China's banks face growing risk
tied to rising bad loans and problems in its real-estate
sector.
Standard & Poor's Ratings Services said Monday it had
revised to negative from stable its assessment of the economic
risks facing China's banking industry, one of Beijing's major
levers as it tries to lift the world's second-largest economy out
of its growth slowdown.
"We view economic risks for China's banking industry as high,"
S&P said in a report. Big lending by banks and the country's
informal shadow-banking system between 2009 and 2013 "has led to
high risks of economic imbalances and elevated credit risks in the
economy," it said.
China's banking regulator didn't respond to requests for
comment.
Despite five interest-rate cuts and several reductions in
bank-reserve requirements since November, China is expected to
struggle to reach its about-7% growth target this year--already the
slowest pace in 25 years. Concerns over China's slowdown and
Beijing's economic management sent global markets reeling this
summer.
Chinese banks are facing their worst year in more than a decade
as lenders try to push bad loans off their books. Profit growth at
Chinese banks slowed significantly during the first half of 2015
compared with the first quarter. The nation's largest lender by
assets, Industrial & Commercial Bank of China Ltd., reported
net profit growth of 0.6% in the first half compared with a year
earlier. By contrast, its first-quarter profit grew 1.4% over a
year earlier, while its first-half 2014 profit grew 7% over the
same period in 2013.
Although Chinese banks have a strong customer deposit base, and
credit growth in the country has slowed, state ownership of major
Chinese banks leads to market distortions and the system lacks
transparency, S&P said. Qiang Liao, an S&P senior director
and author of the report, added that the ratings agency sees a
one-in-three chance that private-sector credit could exceed 150% of
gross domestic product by the end of 2016, up from around 141%
now.
Mr. Liao also said S&P sees a continued risk that China's
real-estate market could undergo a correction. While property sales
have started to rise in some major markets, investment remains weak
and overcapacity in smaller cities continues to drag down the
market.
Bad-loan levels at Chinese banks are low by global standards,
but many analysts question whether the rate accurately reflects the
asset quality among lenders. As worries loom, lenders have been
increasing provisions, but these buffers haven't kept pace with the
proliferation of bad loans.
Ratings agency Moody's Investors Service said earlier this month
that Chinese listed banks face rising operating pressure over the
next one or two years as economic growth slows, while Fitch Ratings
said it sees continued profitability and capitalization pressures
on the sector in the near term.
Others have a more optimistic view. Wei Hou, banking analyst
with brokerage firm Sanford C. Bernstein (Hong Kong) Ltd., said he
sees the outlook improving for China's banking sector. "What
concerned me before was that most banks would keep hiding their bad
loans and the problem would snowball," he said. "Now you're seeing
more disclosure and they're taking steps to deal with them."
Mr. Hou added that he believes the risk of a real-estate crisis
is lower now than it was last year. "I don't see any area that's
going to blow up in the next few years," he added.
S&P said while economic conditions affecting the banking
sector are weakening, it maintains a stable risk assessment for the
banking industry itself, with interest-rate liberalization, a
slower-growing shadow banking sector and China's expanded domestic
bond market all positive developments, it added.
Fanfan Wang
in Shanghai
Write to Mark Magnier at mark.magnier@wsj.com
(END) Dow Jones Newswires
September 21, 2015 08:30 ET (12:30 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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