Global Business

S&P Sees Growing Risk to Chinese Banks

The ratings agency is concerned that private-sector credit in China could exceed 150% of gross domestic product by the end of 2016.
Katie Kuehner-HebertSeptember 21, 2015

Standard & Poor’s on Monday revised its economic risk assessment of China’s banking industry to negative from stable, citing growing risk tied to bad loans and problems in the real estate market.

As The Wall Street Journal reports, Chinese banks are facing their worst year in more than a decade as they 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.

“We view economic risks for China’s banking industry as high,” S&P said in a report, warning that “Credit risks in the Chinese economy may continue to worsen, as indicated by rapidly rising credit losses and still-significant credit growth amid China’s economic slowdown.”

S&P senior director Qiang Liao said the ratings agency saw 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.

S&P also sees a continued risk that China’s real estate market could undergo a correction. While property sales have started to increase in some major markets, investment remains weak and overcapacity in smaller cities continues to weigh on the market.

Moody’s 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 said it sees continued profitability and capitalization pressures on the sector in the near term, according to the WSJ.

Sanford C. Bernstein analyst Wei Hou expects the outlook for China’s banking sector to improve.

“What concerned me before was that most banks would keep hiding their bad loans and the problem would snowball,” Hou told the Journal. “Now you’re seeing more disclosure and they’re taking steps to deal with them.”

The severe slump in Chinese stock markets has helped to roil global sentiment. Concerns over the world’s second-largest economy even played a part in the U.S. Federal Reserve’s decision last week to delay hiking interest rates for the first time in seven years.