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
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Bin Hu
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
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Moody's: Chinese banks face increasingly liberalized interest rate regime