Hong Kong, January 26, 2016 -- Moody's Investors Service says that banks in China (Aa3 stable)
will face a higher degree of uncertainty — and therefore risk —
amid increased volatility in interest rates, exchange rates,
stock prices and fund flows.
"We also anticipate further increases in loan delinquencies,
more defaults on corporate debt and some losses in wealth-management
products, as more borrowers struggle to meet payments against the
backdrop of high financial leverage and a downturn in their respective
sectors," says Christine Kuo, a Moody's Senior
Vice President.
"While the Chinese authorities will implement measures to mitigate
financial market volatility and corporate default, the effectiveness
of such measures will vary, because of the challenges of managing
China's large and complicated market," adds Kuo.
Moody's analysis is contained in its just-released report
titled "Banks -- China: Frequently Asked Questions about Chinese
Banks amid Recent Volatility," and is authored by Kuo.
Moody's report says that the financial performance of Chinese banks
over the next two years will be driven primarily by the evolution of their
asset quality, which is in turn a reflection of their risk appetites.
Banks focusing on growing loans to small and midsize borrowers will see
a faster rise in credit costs, because such customers are more vulnerable
to sector downturns and financial market volatility. While higher
yields will help these banks withstand some pressure from narrowing net
interest margins, the benefits for earnings are small when compared
to the potential rise in asset quality concerns.
Competition will also lower the banks' ability to charge higher risk premiums.
On the effects of RMB devaluation on Chinese banks, Moody's
says any direct impact will be modest, because the banks show only
small net open positions on foreign-currency exposures.
However, the indirect impact of a weakening RMB on Chinese banks
will be more material, if significant RMB devaluation leads to company
defaults. This risk is moderate but has risen because Chinese companies,
particularly real estate developers and leasing companies, have
in recent years increasingly tapped foreign-currency debt to fund
their business expansion.
As for the recent stock market volatility in China, Moody's
says that Chinese commercial banks demonstrate a low direct exposure to
equity price movements, because of their low direct holdings of
listed stocks.
Banks that are more involved in extending stock loans, distributing
stock-related wealth management products and providing custody
services to stock funds could see pressure on their asset quality and
profitability if stock market weakness persists. Nevertheless,
Moody's expects that such an impact will be limited, particularly
for large banks, due to the banks' low involvement in stock
market-related business.
On the banks' asset quality in particular, Moody's says
that the true asset quality of Chinese banks is weaker than what their
headline metrics suggest. For example, the Chinese banking
system reported a non-performing loan ratio of 1.59%
at end-September 2015, up by only 34 basis points from the
level seen at end-2014, and indicating only a moderate degree
of weakening.
However, this headline number was biased downwards due to loan growth,
loan classifications, write-offs and the sale of non-performing
loans.
Moody's therefore focuses on new 90-day delinquencies as
a percentage of average loans for individual banks in assessing the banks'
asset quality.
Moody's rating assessments also consider the potential rise in liquidity
management challenges at banks that show a higher reliance on interbank
funds.
While Moody's believes the central bank will inject liquidity into
the market when necessary, Moody's expects more frequent episodes
of tight funding conditions due to capital flows and the banks'
growing portfolio of illiquid investments.
Moody's points out that Chinese banks have used their loan-loss
reserves to deal with increasing asset-quality problems.
Such an approach reduces the impact on their earnings and protects their
capital base. However, their loss cushions have become thinner,
as seen by the sector average loan-loss coverage ratio falling
to 191% year-over-year at end-September 2015
from 247%.
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_187275.
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for the most updated credit rating action information and rating history.
Christine Kuo
Senior Vice President
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
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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 higher risks and loan delinquencies