Moody’s Upgrades Outlook for China’s Banking System from Negative to Stable

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Moody’s Investor Services has just revised it outlook for China’s banking system from negative to stable, following the implementation of concerted policy measures to curb the country’s burgeoning shadow banking sector.

According to Moody’s the outlook revision follows the adoption of more coordinated policy measures by Beijing to curb China’s shadow banking sector, which its analysts believes will help to reduce asset risk for banks as well as correct certain key imbalances in the financial sector.

“The revision reflects our expectations that nonperforming loan formation rates will be relatively stable at current levels,” said Yulia Wan, Moody’s Assistant Vice President and Analyst.

According to Moody’s regulators have stepped up efforts to combat to long-standing sources of risk for China’s financial system: the accumulation of corporate leverage and the rapid expansion of the shadow banking sector.

Wan’s analysis in the Moody’s report “Banking System Outlook Update – China: Improved operating environment and prudential regulations drive change to stable outlook,” assessed a total of five drivers for China’s banking sector – operating environment, asset quality and capital,  funding and liquidity, profitability and efficiency, and systemic support.

Moody’s gave the Chinese banking system a stable rating for three key indices of the sector’s health – operating environment, asset quality and capital and systemic support, following the launch of government policies to prop up growth and reduce systemic financial risk.

Funding and liquidity as well as profitability and efficiency were both assessed as “deteriorating.”

Moody’s expects asset risk to ease over the next 12 -18 months, and capitalisation to hold steady, while delinquency rates will also remain stable as corporate profits stage a recovery on the back of sound economic performance, firm commodity prices and a slowdown leverage growth.

Growth is expected to receive a boost from policies for spurring investment in designated sectors, including infrastructure and the development of owner-occupied residential real estate.

Bank profitability could falter, however, due to ongoing pressure on net interest margins, as well as slowing fee growth resulting from stricter regulations on wealth management, consultancy and custodian services revenues that are part of efforts to combat shadow banking.

Small and medium-sized banks will also continue to face tight liquidity as they raise their dependence upon short-term, confidence-sensitive funds to prop up their illiquid assets.

With respect to the overall banking sector, Moody’s expects the Chinese government to continue to provide strong support whenever crisis arises, as well as retain firm control by maintaining its status as a main shareholder of key banks.

Moody’s assessed a total of 24 Chinese banks in its analysis, collectively accounting for 65% of total system assets as of the end of 2016. Lenders whose outlooks are considered stable currently comprise 89% of total assets held by Chinese banks that Moody’s includes in its analysis.