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Announcement:

Moody's: Government support key element in rating Chinese banks

 The document has been translated in other languages

18 May 2015

Singapore, May 18, 2015 -- Moody's Investors Service says a key element in its rating of Chinese banks is the level of government support that the banks receive.

"The overall support that the Chinese authorities provide to China's banking system is strong," says Simon Chen, a Moody's Vice President and Senior Analyst.

"However, economic and policy developments, including the targeted allocation of credit to particular industries, and the newly introduced deposit insurance scheme will eventually require the government to take a more nuanced and differentiated approach in providing support to individual banks," adds Chen.

Moody's analysis is contained in its just-released report titled "Chinese Banks: Government Support to Remain Strong But Become More Nuanced," and is authored by Chen.

Moody's report says that maintaining stability in China's financial system will remain the top policy priority, given that the Chinese authorities will be keen to manage the potential adjustment risks associated with the increased use of market discipline mechanisms, in a system that has long operated under implicit guarantees.

Moody's points out that its Joint Default Analysis under its bank rating methodology aims to capture and quantify such differences in support levels. For example, Moody's ratings for the five largest Chinese banks by assets incorporate 4-5 notches of uplift, because the ratings take into account the banks' systemic importance and high levels of state ownership.

In contrast, Moody's has typically assigned 1-3 notches of uplift to the ratings of mid-sized joint-stock commercial banks.

Moody's report further points out that its Joint Default Analysis focuses on the following two broad considerations:

1) Potential contagion risk -- impact on market and local economy: This captures the risk that the unmitigated failure of a bank would trigger panic and undermine general confidence in the broader financial system. At the same time, this represents a bank's perceived value and importance in furthering the government's policy agenda and the activities of local economies.

2) Form and extent of public involvement: This factor reflects the economic interests the government or government-related institutions would miss out on if a bank were to cease operating as a going concern. These interests could be tangible, such as the actual equity stake held either directly or indirectly by the government in a bank.

In addition, Moody's points out that there would likely be reputation risks to the government if it decided not to support a bank in which it holds a significant stake, and in which the government is perceived to have some influence on bank strategy.

Moody's Joint Default Analysis does not take into account the indirect support the government provides to banks on a regular basis; for example, in supporting a bank's key borrowers. Such indirect support is instead taken into account in Moody's consideration of the banks' standalone baseline credit assessment.

Moody's will also — as part of its regular rating process — make further adjustments to take into account other qualities that are external or beyond its Joint Default Analysis framework.

Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1001214

Moody's offers complimentary access to its new topic page, China -- Reform and Rebalancing, a centralized source for Moody's research related to key credit issues in China as the country's rebalancing story unfolds. This report is part of Moody's ongoing coverage on this theme. Register today at www.moodys.com/chinarebalancing for access to all research on this page.

Recent Moody's publications relating to China Reform and Rebalancing include:

• Sub-Sovereign: Chinese Regional and Local Government Bonds Qualify as Collateral for Central Bank Lending Facilities, a Credit Positive

• China: China's Interest Rate Reduction Is Credit Negative for Banks

• Chinese CMBS: Anchor Tenants Offer Cash Flow Stability, But Limit Property Valuation Potential If They Are Weak

• Outreach, Heard From the Market -- Deeper and More Liquid Secondary Market Needed in China

• Property - China: Latest PBOC Rate Cut Should Support Sales, Is Credit Positive for Developers

• Credit Policy: Chinese Issuers Behind Negative Credit Trend for Asia Pacific Corporates

• Government of China: Plan to Boost Employment Is Credit Positive for the Sovereign

• China Property: Efforts by Foshan and Henan Province to Boost Property Sales Are Credit Positive for Developers

• Quarterly China Shadow Banking Monitor (Presentation)

• China's Anti-Corruption Campaign Is Generally Credit Positive, Despite Some Event Risk (Presentation)

These reports are available on http://www.moodys.com/chinarebalancing.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, 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.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Simon Chen
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
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 Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Government support key element in rating Chinese banks
No Related Data.
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