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Moody's puts negative outlook on China's banking system

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Staff writer ▼ | May 31, 2016
Moody's Investors Service says the outlook on China's banking system remains negative.
China banking system
Asian banking   Rising system leverage and worsening credit conditions
This is reflecting a challenging operating environment, and banks' deteriorating asset quality and profitability.

"Rising system leverage and worsening credit conditions exert continued pressure on the banks' asset quality and profitability," says Yulia Wan, a Moody's Assistant Vice President and Analyst.

"In addition, China's sovereign outlook change to negative from stable in March 2016 affected the ratings of banks that had incorporated a degree of government support and uplift," says Wan.

The presentation - "Rising System Leverage and Impact on Banks' Credit Profiles" - was held at Moody's 2016 Mid-Year China Conference: Understanding the Risks of High and Rising Leverage in Beijing on 31 May. The Shanghai conference is scheduled for 2 June. The morning seminars feature senior Moody's managers and analysts, and cover a broad range of sub-themes.

The change in Moody's Macro Profile on China's banking system to "Moderate" from "Moderate+" in March 2016 reflected the continued rise in leverage in the Chinese economy from an already high level. The change of the Macro Profile has led Moody's to reassess Chinese banks' financial factors and standalone profiles.

"While our rated banks are not immediately affected by this Macro Profile change, their standalone credit profiles face downward pressure," says Wan.

According to Moody's, asset quality is deteriorating with increasing nonperforming loans (NPLs) and rising credit costs; there is a widening gap between NPLs and 90+ day delinquencies as greater numbers of 90+ day delinquencies are not recognized as NPLs.

In addition, shadow banking assets accounted for nearly 80% of GDP in 2015. Increasing interconnectedness between banks and the shadow banking system could put additional pressures on banks' asset quality.

Investments in loans and receivables among the 26 listed banks in China jumped four-fold to RMB10.4 trillion from RMB2.5 trillion between 2012 and 2015.