Hong Kong, December 05, 2016 -- Moody's Investors Service says that the outlook for the Chinese
banking system is negative, as the operating environment will become
more challenging in the coming 12-18 months, reflecting slower
economic growth, an increase in corporate sector restructuring,
and rising concerns over elevated asset prices in some areas.
"Our baseline scenario assumes a further moderation in real GDP
growth to 6.3% in 2017 from 6.7% in the first
three quarters of 2016. In view of weaker demand for corporate
loans and the Chinese authorities' stance to pursue corporate deleveraging,
we expect credit growth to moderate as well," says Christine
Kuo, a Moody's Senior Vice President.
"Accordingly, during the horizon for our outlook of 12-18
months, asset quality will remain pressured; capitalization,
and funding and liquidity will be stable; and profitability will
deteriorate, while the system will also be experiencing the effects
of the deleveraging in the corporate sector," adds Kuo.
"At the same time, we expect government support to remain
strong for the major banks, reflecting the policy imperative of
maintaining public confidence and systemic stability. And,
while we think that government support for smaller banks will become more
selective following the implementation of the deposit insurance scheme,
it will remain high for the larger regional banks," says Yulia
Wan, a Moody's Assistant Vice President and Analyst.
Moody's conclusions were contained in its just-released,
"Banking System Outlook - China Deteriorating Operating Environment
and Asset Quality Drive Negative Outlook" co-authored by
Kuo and Wan.
Moody's expectation is that the Chinese authorities will step up
their efforts to tackle the country's rising level of corporate leverage
over the next 12-18 months.
While this heightened policy focus to contain leverage and close non-viable
companies will address a key financial system weakness, it also
raises adjustment risk for the banks in the near term by increasing corporate
defaults and loan restructurings.
As indicated asset quality will remain pressured. Debt restructuring
for distressed borrowers will help keep the headline nonperforming loan
(NPL) ratio stable, but will also result in economic losses for
creditors of various classes, including the banks.
Broad liquidity conditions will remain satisfactory, reflecting
slowing loan growth, the central bank's overall supportive monetary
policy and the system's large deposit base. On the other hand,
we see limited room for further policy easing, given the policy
focus shift towards deleveraging, containing risks from capital
outflows, the steep rise in property prices and gradual increase
in inflation. This could pressure the banks' liquidity management,
especially for mid- and small-sized banks which have become
increasingly reliant on wholesale funding to support their investments
in assets with longer durations.
With capitalization, the banks will maintain stable and adequate
capital levels, underpinned by slowing asset growth and capital-raising.
Mid and small-sized banks, which tend to grow their assets
faster than large banks but have weaker internal capital generation,
will face higher capital pressure and be more likely to turn to equity
and capital securities issuances to sustain their capital levels.
Furthermore, profitability will be pressured as moderating economic
growth, the adoption of a more conservative growth strategy by the
major banks and the broad shift towards deleveraging constrain the banks'
income prospects from lending. Net interest income still accounted
for around 70% of total revenue in the first three quarters of
2016.
However, this pressure on profitability will be partly mitigated
by continued growth in non-lending income and the banks' favorable
cost structures.
In summary, Moody's assessments for the key drivers for China's
banking system outlook are: Operating Environment, Deteriorating;
Asset Quality and Capital, Deteriorating/Stable; Funding and
Liquidity, Stable; Profitability and Efficiency, Deteriorating;
and Systemic Support, Stable.
Moody's rates 22 banks in China that together accounted for 65%
of total system assets as of 30 June 2016.
Subscribers can read the full report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1048498
The report may also be found through Moody's topic page "China's Trilemma:
Growth, Reform and Stability", available at http://www.moodys.com/chinarebalancing.
This page provides a centralized source for Moody's research related to
key credit issues in China as the country's macroeconomic story continues
to unfold.
Recent Moody's publications relating to China's Trilemma include:
• Securitization -- China: Sector Update --
Q3 2016: Auto ABS and RMBS Performed Well, Issuance Volume
Down
• Property -- China: 2017 Outlook --
Stable Business Conditions; Rising Risk of Slower Sales from Tighter
Controls
• China, Government of
• Regional and Local Governments -- China: Debt
and Finances Snapshot
• Non-Financial Corporates -- China: 2017
Outlook -- Revenue Is Stabilizing; Leverage to Remain
Elevated
• Asset Managers -- China: Country's Launch of
First CDS Is Credit Positive
• Asian Insurers: Insurance M&As by Japanese and Chinese
Insurers: Acquisition Targets and Credit Impacts Vary
• Inside China -- October 2016
• China Credit: Deleveraging Reforms Move to Guideline Stage;
Policy Supports Economy
• China Credit Market: Dongbei Special Steel Bankruptcy Highlights
Restructuring Shift for SOEs
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This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
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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
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Minyan Liu
Associate Managing Director
Financial Institutions Group
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Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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