Chinese banks hit with negative outlook from ratings agencies
(7 December 2016 – China) Moody’s and Fitch Ratings have issued negative outlooks for China’s banking industry, expecting profitability and asset quality to deteriorate further, threatened by high levels of corporate borrowing.
Both agencies are blaming lower lending income prospects combined with moderating economic growth, they lowered expectations for China’s real GDP growth targets for next year.
Moody’s baseline scenario assumes further moderation in real GDP growth to 6.3 percent in 2017 from 6.7 percent in the first three quarters of 2016. While Fitch’s economics team forecasts China’s real GDP growth of 6.4 percent in 2017, down from a projected 6.7 percent in 2016
Additionally, profitability of Chinese banks will remain under pressure, the result of declining asset quality and a challenging operating environment, the agencies have concluded.
The ratings agencies are concerned about the Chinese banks’ underlying asset quality, which they say will remain will remain vulnerable, burdened by highly leveraged and loss-making borrowers.
“It also raises adjustment risk for the banks in the near term, by raising corporate defaults and loan restructurings,” Moody’s said in a new report.
Fitch added that most of China’s banks are underpinned by the expectation of government support, as the sector plays such a strategic role in supporting economic stability and avoiding widespread defaults.
“The banks’ ability to contain costs and drive fee-income growth will be key differentiating factors.”
Both agencies, however, also agree that government support will remain resolute for the banking sector.
That state backing, Moody’s added, is expected to remain especially strong for the country’s major banks to maintain public confidence and systemic stability.
The scheme is aimed at better disciplining the country’s lenders and their customers. Up to 500,000 yuan in deposits made by businesses and individuals per bank are insured. More than 99 per cent of the nation’s depositors are covered, backed by a fund run by the People’s Bank of China.