Chinese banks face profit squeeze: S&P

The recent moves by Chinese authorities to tighten monetary policy and other efforts to contain credit risks could noticeably weaken the profitability of China's banking sector for the next few years.

According to an article titled For China's Banks, A Little Pain Now May Prevent A Lot Of Pain Later, by Standard & Poor's Ratings Services, suggests that the regulator's recent actions may help to prevent a harder landing for the sector.

This month China increased banks' reserve requirements for the fifth time this year to rein in prices, amidst the risk that tightening measures would slowdown the world's second-biggest economy.

The central bank's move came following reports that pointed to inflation and lending exceeding the estimates of economists in April, with consumer prices rising more than 5 per cent for a second month. (See: China ups banks' reserve requirement for a fifth time this year) Inflation has started spreading beyond food to other goods, while the economy has shown signs of cooling.

"Inflation and a possible economic slowdown stemming from tightening measures could lead to a spike in credit losses over the next two to three years," said Qiang Liao, director of Financial Services Ratings at Standard & Poor's.

"The measures could also contribute to greater divergence in credit quality among major players and small lenders. But in our base-case stress scenario, we expect credit losses to be manageable," he adds.

The article suggests that the sector's cumulative non-performing loans could reach 5 per cent - 10 per cent of total loans in the next three years under a stress scenario that the lending rates rise significantly and the government support for project loans turns out to be negligible.

"We stand by our stable outlook for the sector because we have already considered the expected volatility in credit metrics in our assessment of China's banking industry," said Mr. Liao. "In our view, key metrics--including asset quality, profitability, liquidity, and capitaliasation--will likely support Chinese banks' stand-alone credit profiles.

This is especially true for the major players that we rate."