As China's economic growth decelerates and some industry sectors face growing oversupply issues, the risks from China's recent credit boom appear to be rising to the surface for the country's banks.
That is according to Standard & Poor's Ratings Services' recently published annual survey on China's top banks, titled "China Credit Spotlight: Diverging Credit Quality Could Result In Varying Degrees Of Resilience For The Top 50 Banks."
The survey examines the credit profiles of China's top 50 banks by asset size, and assesses the credit outlook for China's banking sector.
"Rising credit costs, compressing interest margins, and growing pressures on non-interest incomes are likely to constitute a triple-hit to bank earnings," says Standard & Poor's senior director Qiang Liao. "In particular, we think it is highly likely that the banks could incur substantially higher credit losses in the coming years."
The report suggests that China's top banks will demonstrate varying levels of resilience amid the more challenging operating conditions. The mega banks and national banks appear to be better-placed to withstand China's economic downturn. In contrast, a majority of the smaller players are likely to experience a further weakening of capitalization and some may even witness significantly deteriorated funding and liquidity profiles.
"We believe the top banks, particularly the national and large regional banks, could spearhead massive market-driven consolidation, which proved to be hard to achieve in a buoyant market," says Liao. "However, the pace of consolidation will hinge on the severity of the present credit downturn."
The report also notes that liquidity management among China's top banks is becoming increasingly strained.
"Should those regional banks that have relied heavily on interbank financing suffer severe credit losses and potential depositor runs, we would expect there to be wider negative repercussions for the banking sector as a whole," says Liao.