The outlook for China’s banking system is negative for the next 12 to 18 months, as rated by Moody’s Investors Service, thanks to slower economic growth, increased corporate sector restructuring and elevated asset prices.
"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,” said Christine Kuo, a Moody's senior vice president. “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."
"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,” said Yulia Wan, a Moody's assistant vice president and analyst. “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."
The ratings agency also anticipates Chinese authorities will increase their efforts to slow the nation’s increasing level of corporate leverage over the next year and a half, which in turn could increase corporate default risk and loan restructurings in the near term.
Meanwhile, debt restructuring for distressed borrowers is likely to result in economic losses for creditors of various asset classes, including banks, Moody’s analysts said.
As liquidity conditions are likely to remain stable thanks to a supportive central bank, “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,” analysts said. This situation could bring added risk to small- and mid-size banks that have grown reliant on wholesale funding to support longer-duration investments.
“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,” Moody’s said. “Net interest income still accounted for around 70% of total revenue in the first three quarters of 2016.”
– Nicholas Stern, editorial associate