Chinese Banks Face Increasingly Liberalised Interest Rate Regime

Moody’s Investors Service says that an increasingly liberalised interest rate environment in China could challenge the banks’ current management capacities in a wide range of areas, including business strategy, risk control and governance.

“These concerns underpin our current low stand-alone ratings on Chinese banks. While they can still boast reasonably strong financial metrics, their abilities to adapt to a fully market-driven pricing environment remain untested, and may be subject to additional uncertainties, such as how policy makers will choose to sequence coming measures,” said Bin Hu, a Moody’s vice president and senior analyst. “These issues come on top of the current risks posed by rising asset quality pressures and a slowing economy.

“On the other hand, these challenges also invite greater differentiation within the sector as they will highlight the importance of looking into each bank’s individual ability to manage its risks and re-position in an evolving and competitive landscape,” said Hu. “China’s bank industry has long been characterised by its homogeneity, but the latest developments may over time widen the range of standalone ratings currently seen among the country’s rated banks.”

Moody’s rates a total of 13 Chinese commercial banks, which together account for 60.5% of the banking system’s loans and 63.6% of its deposits. Their stand-alone credit profiles range from D+/ba1 to D-/ba3. They all have a stable outlook.

The challenges include negative pressures on interest rate margin, as allowing the banks greater flexibility in setting rates will narrow such margin as they will need to offer more competitive rates on their broad deposits and loans.

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