China's Debt_ S&P says China banks face growing bad debt risk

MarketWatch

S&P says China banks face growing bad debt risk

Published: Sept 21, 2015 8:18 a.m. ET
By MARK MAGNIER

BEIJING--In the latest sign of headwinds hitting the Chinese economy, a U.S. ratings firm said China's banks face growing risk tied to rising bad loans and problems in its real-estate sector.

Standard & Poor's Ratings Services said Monday it had revised to negative from stable its assessment of the economic risks facing China's banking industry, one of Beijing's major levers as it tries to lift the world's second-largest economy out of its growth slowdown.

"We view economic risks for China's banking industry as high," S&P said in a report. Big lending by banks and the country's informal shadow-banking system between 2009 and 2013 "has led to high risks of economic imbalances and elevated credit risks in the economy," it said.

China's banking regulator didn't respond to requests for comment.

Despite five interest-rate cuts and several reductions in bank-reserve requirements since November, China is expected to struggle to reach its about-7% growth target this year--already the slowest pace in 25 years. Concerns over China's slowdown and Beijing's economic management sent global markets reeling this summer.

Chinese banks are facing their worst year in more than a decade as lenders try to push bad loans off their books. Profit growth at Chinese banks slowed significantly during the first half of 2015 compared with the first quarter. The nation's largest lender by assets, Industrial & Commercial Bank of China Ltd., reported net profit growth of 0.6% in the first half compared with a year earlier. By contrast, its first-quarter profit grew 1.4% over a year earlier, while its first-half 2014 profit grew 7% over the same period in 2013.

Although Chinese banks have a strong customer deposit base, and credit growth in the country has slowed, state ownership of major Chinese banks leads to market distortions and the system lacks transparency, S&P said. Qiang Liao, an S&P senior director and author of the report, added that the ratings agency sees a one-in-three chance that private-sector credit could exceed 150% of gross domestic product by the end of 2016, up from around 141% now.

Mr. Liao also said S&P sees a continued risk that China's real-estate market could undergo a correction. While property sales have started to rise in some major markets, investment remains weak and overcapacity in smaller cities continues to drag down the market.

Bad-loan levels at Chinese banks are low by global standards, but many analysts question whether the rate accurately reflects the asset quality among lenders. As worries loom, lenders have been increasing provisions, but these buffers haven't kept pace with the proliferation of bad loans.

Ratings agency Moody's Investors Service said earlier this month that Chinese listed banks face rising operating pressure over the next one or two years as economic growth slows, while Fitch Ratings said it sees continued profitability and capitalization pressures on the sector in the near term.

Others have a more optimistic view. Wei Hou, banking analyst with brokerage firm Sanford C. Bernstein (Hong Kong) Ltd., said he sees the outlook improving for China's banking sector. "What concerned me before was that most banks would keep hiding their bad loans and the problem would snowball," he said. "Now you're seeing more disclosure and they're taking steps to deal with them."

Mr. Hou added that he believes the risk of a real-estate crisis is lower now than it was last year. "I don't see any area that's going to blow up in the next few years," he added.

S&P said while economic conditions affecting the banking sector are weakening, it maintains a stable risk assessment for the banking industry itself, with interest-rate liberalization, a slower-growing shadow banking sector and China's expanded domestic bond market all positive developments, it added.

Fanfan Wang in Shanghai

Write to Mark Magnier at mark.magnier@wsj.com

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