Moody’s Predicts Stability for China’s Banking System

Moody’s Investors Service says that the outlook for China’s banking system is stable, as it has been since March 2011, reflecting Moody’s assessment that the overall performance of the country’s banks will remain in line with their rating levels in the next 12-18 months.

“Our stable outlook is further underpinned by our view that China will stay on a path of steady expansion and pursue an agenda of orderly reform; and we also note the pro-market announcements which have followed the Third Plenum of the Communist Party leadership in mid-November,” says Christine Kuo, a Moody’s vice president and senior credit officer.

Kuo was speaking on the release of Moody’s latest “Banking System Outlook: China”, and which covers the operating environment; asset quality and capital; funding and liquidity; profitability and efficiency; and systemic support.

In terms of challenges for the banks, the Moody’s report notes several pressure points that will mostly likely be reflected in their asset quality and profitability. These challenges will come from:

  1. Economic rebalancing
  2. Rising financial leverage
  3. Increasing interest rate liberalisation
  4. A greater shift towards higher-risk loan segments
  5. Continued large fluctuations in deposit flows.

Nonetheless, despite Moody’s expectation of lingering asset quality pressure, the report notes that the banks have strong loss-absorbing cushions, in the form of provisions and earnings, as buffers against the potential rise in credit costs.

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