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Announcement:

Moody's: Chinese banks face increasingly liberalized interest rate regime

 The document has been translated in other languages

Global Credit Research - 16 Oct 2012

Hong Kong, October 16, 2012 -- Moody's Investors Service says that an increasingly liberalized interest rate environment in China could challenge the banks' current management capacities in a wide range of areas, including business strategy, risk control and governance.

"These concerns underpin our current low stand-alone ratings on Chinese banks. While they can still boast reasonably strong financial metrics, their abilities to adapt to a fully market-driven pricing environment remain untested, and may be subject to additional uncertainties, such as how policy makers will choose to sequence coming measures," says Bin Hu, a Moody's Vice President and Senior Analyst.

"These issues come on top of the current risks posed by rising asset quality pressures and a slowing economy," adds Hu, who was speaking on the release of a new Moody's report: "Chinese Banks: Interest Rate Liberalization Brings More Than Interest Rate Risk."

"On the other hand, these challenges also invite greater differentiation within the sector as they will highlight the importance of looking into each bank's individual ability to manage its risks and re-position in an evolving and competitive landscape," says Hu. "China's bank industry has long been characterized by its homogeneity, but the latest developments may over time widen the range of standalone ratings currently seen among the country's rated banks."

Moody's rates a total of 13 Chinese commercial banks, which together account for 60.5% of the banking system's loans and 63.6% of its deposits. Their stand-alone credit profiles range from D+/ba1 to D-/ba3. They all have a stable outlook.

The Moody's report -- which Hu authored -- follows the decisions in June and July by the central bank, the People's Bank of China (PBoC), to widen the range against which Chinese banks can benchmark their lending and deposit rates, and which Moody's sees as an acceleration towards a fully liberalized environment.

"This development is credit negative and promises to play an increasingly important role in our assessment of Chinese banks, as it means potential challenges for them on multiple levels," says Hu.

The challenges include negative pressures on interest rate margin, as allowing the banks greater flexibility in setting rates will narrow such margin as they will need to offer more competitive rates on their broad deposits and loans.

Moody's estimates that, after carving out the effects of cuts in benchmark rates, the increased flexibility with which the banks can set their own rates, because of the latest PBoC decisions alone, will depress Chinese commercial banks' net interest margins by 4-6 basis points in 2012 and reduce their net profits by around RMB28.5 billion (USD4.5 billion), or 3% of the system's net profit for 2011.

Looking further ahead, Moody's simulation for 2013 shows that the negative impact on net interest margins could be as much as 10-13 basis points and could reduce net profit by RMB79.6 billion (USD12.6 billion).

In addition, challenges will emerge in liquidity management, as the broad liberalization of interest rates could encourage depositors to seek greater yields and permanently introduce market-driven volatility into the entire funding structure.

The report also sees a migration to higher-risk borrowers and complex businesses, adding that the drive to maintain profitability, in view of the likely compression in net interest margins, could push the banks to increase lending to higher-risk borrowers, or become involved in complex business activities.

"In particular, we note that Chinese banks have been stepping up lending to small- and medium-sized enterprises, a segment that has allowed them to maintain loan returns close to, or above benchmark loan rates, but which can be highly prone to more asset quality issues, as shown in the latest round of bank results," says Hu.

Looking back at recent history, the report says that interest rate liberalization in China has taken on various forms. Moody's has long viewed the proliferation of structured deposits and wealth-management products at Chinese banks in recent years as a de facto form of rate deregulation as they represent substitutes for deposits.

Subscribers can access this report via this link: http://www.moodys.com/research/Chinese-Banks-Interest-Rate-Liberalization-Brings-More-Than-Interest-Rate--PBC_146017

***

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Bin Hu
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Chinese banks face increasingly liberalized interest rate regime
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