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Fitch: China's Bank Results to Highlight Rising Risks
March 6, 2017 / 2:30 AM / 8 months ago

Fitch: China's Bank Results to Highlight Rising Risks

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, March 05 (Fitch) Fitch Ratings expects upcoming earnings announcements for Chinese banks to provide further evidence of rising system leverage and profitability pressures from narrowing interest margins and weakening asset quality. We view continued rapid credit growth, and the increasing complexity and interconnectedness of the financial system, as a rising and significant medium-term threat to China's financial stability. Chinese banks are due to release 2016 earnings reports this month. The People's Bank of China's (PBOC) quarterly report has already pointed to a slowdown in the commercial banking sector's net profit growth last year, as well as a lower return on assets and equity. Bank earnings reports are likely to confirm these negative trends. They are also likely to show that reported NPL ratios remained relatively stable, but banks are heavily managing NPLs via debt resolution initiatives. Fitch expects net interest margins to remain under pressure in 2017. The average loan borrowing rate dropped 20bp in December from a year earlier, as a rising proportion of new loans were priced below the PBOC's benchmark rate during 2016 - often an indicator that more lending is going to SOEs at favourable rates. Meanwhile, the rise in reverse repo rates is pushing up funding costs, especially for rapidly-growing mid-tier banks that are more reliant on central bank facilities - an indicator of tight funding in this sector. The official commercial banking sector NPL ratio was just 1.74% at the end of 2016, and "special-mention" loans fell for the first time since 2014. However, Fitch does not believe this apparent improvement reflects underlying credit conditions, as on-balance sheet asset quality indicators have benefitted from recently-established debt-for-equity swaps and the offloading of distressed debt to asset management companies - which continue to grow rapidly. Some of these transactions might not be commercially driven, might not involve a true transfer of risk or may simply shift that risk to other parts of the financial system, without any write-down. Banks also have an incentive to delay recognition of asset impairment to keep provision coverage ratios above the 150% regulatory minimum. Pressure on asset quality in large part reflects a build-up in system leverage, which Fitch expects to continue in 2017. Bank credit also continues to become more complex and the financial system increasingly interconnected, making it harder to assess underlying risks. Bank assets grew by 15.8% yoy in 2016, which was faster than total social financing (TSF) and renminbi loans, as credit continued to shift into non-loan financial products, such as investments in asset management plans, trusts and wealth management products (WMPs). This was despite regulatory measures introduced over the last year to curb the use of these products, which carry lower risk-weight relative to loans and allow banks to bypass lending restrictions. The PBOC will broaden its credit definition in 1Q17 to include off-balance-sheet WMPs, having acknowledged that their underlying use of funds is not materially different from on-balance-sheet credit and that their growth runs counter to deleveraging efforts. Fitch has for some time highlighted risks associated with the increased use of WMPs, which we believe makes lenders vulnerable to asset-quality shocks and strains on funding and liquidity. The outstanding balance of off-balance-sheet WMPs grew by more than 30% yoy to over CNY26trn at end-2016. Entrusted lending is also adding to financial-sector risks. There are indications that some SOEs are using their easier access to bank credit to on-lend to riskier borrowers, including those operating in sectors facing overcapacity. Excessive entrusted lending has potential to undermine an SOE's financial profile, and banks cannot easily track the ultimate use of loan proceeds. Entrusted loans accounted for 8.5% of outstanding TSF in January, up from 8.0% a year earlier and around 3.0% in the early 2000s. Contact: Grace Wu Senior Director Financial Institutions +852 2263 9919 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Jonathan Cornish Managing Director Financial Institutions +852 2263 9901 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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