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Moody's Investors Service says the outlook on China's banking system remains negative, reflecting a challenging operating environment, and banks' deteriorating asset quality and profitability.
“Rising system leverage and worsening credit conditions exert continued pressure on the banks' asset quality and profitability,” says Yulia Wan, a Moody's Assistant Vice President and Analyst.
“In addition, China's sovereign outlook change to negative from stable in March 2016 affected the ratings of banks that had incorporated a degree of government support and uplift,” says Wan.
The presentation — “Rising System Leverage and Impact on Banks' Credit Profiles” — was held at Moody's 2016 Mid-Year China Conference: Understanding the Risks of High and Rising Leverage in Beijing on 31 May. The Shanghai conference is scheduled for 2 June. The morning seminars feature senior Moody's managers and analysts, and cover a broad range of sub-themes.
The change in Moody's Macro Profile on China's banking system to “Moderate” from “Moderate+” in March 2016 reflected the continued rise in leverage in the Chinese economy from an already high level. The change of the Macro Profile has led Moody's to reassess Chinese banks' financial factors and standalone profiles.
“While our rated banks are not immediately affected by this Macro Profile change, their standalone credit profiles face downward pressure,” says Wan.
According to Moody's, asset quality is deteriorating with increasing nonperforming loans (NPLs) and rising credit costs; there is a widening gap between NPLs and 90+ day delinquencies as greater numbers of 90+ day delinquencies are not recognized as NPLs.
In addition, shadow banking assets accounted for nearly 80% of GDP in 2015. Increasing interconnectedness between banks and the shadow banking system could put additional pressures on banks' asset quality.
Investments in loans and receivables among the 26 listed banks in China jumped four-fold to RMB10.4 trillion from RMB2.5 trillion between 2012 and 2015.
Moody' stressed that these investments are an opaque source of asset risk.
However, Moody's says there are several mitigating factors that support the credit profiles of Chinese banks.
These include the banks' (1) good profitability relative to global peers, despite increasing impairment charges and pressure on net interest margin; (2) loan loss reserves, which provide a buffer against losses despite its rapid decline; (3) broadly stable liquidity, despite pressures from capital outflows and a growing portfolio of illiquid investments; (4) adequate capital, though falling behind global standards; (5) increasing NPL write-offs and sales; (6) support from the government, which remains a strong and key credit factor.
This year's conference will include the following plenary sessions:
• Incorporating government support in the ratings of SOEs amid rising defaults
• China property outlook — slowing growth and increasing competition raise risks
• Why does the build-up in corporate leverage matter to the sovereign?
• Does high leverage pose a risk to financial system stability?
• What risks do corporates face from high leverage, overcapacity and restructuring?
• Diversifying sources of finance
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