Reforms Boosting China’s Banking System
In 2006 and the first half of 2007, reforms continued on track for the Chinese banking system as several more large banks completed their equity IPOs, according to Moody’s Investors Services. During the past two years, improving financial fundamentals due to recapitalizations and problem loan reductions have contributed to upgrades in the financial strength ratings of the Chinese banks, from an average of E+ to D-, Moody’s says in a new Outlook for China’s banking system.
The government has made a concerted effort to improve the banks’ overall financial metrics through capital infusions, loan sales and carve-outs, and by promoting the successful sale of new shares in both the domestic and international public markets.
Also supporting the positive outlook is China’s improving country risk profile and regulatory infrastructure. Moody’s says its July 2007 upgrade of China’s A2 foreign currency sovereign rating and ceilings to A1 is indicative of the country’s success in managing its economic transition and of its strong external and fiscal performance. The deposit ratings of the largest Chinese banks were also upgraded to A1 from A2 as a result.
The relatively low D- average BFSR for the Chinese banking system—Moody’s measure of intrinsic creditworthiness and the potential need for external support—points to the continued high levels of problem and special mention loans of the largest banks, their developing capital adequacy, and below average profitability metrics. Upward movement in the average BFSRs therefore hinges on sustained improvements in asset quality, risk-weighted capital, and core profit generation, Moody’s said.
We believe the Chinese banks are now better positioned to reap the benefits of the country’s dynamic economy and investment conditions, backed by the government’s strong fiscal and monetary management.
Significant challenges remain nonetheless, Moody’s says. “While recent externally-led recapitalizations have improved the financial condition of the banks, they will need to continue developing their corporate governance and risk management architecture, and disperse it through their vast branch networks, in order to minimize future asset quality problems.”
The Moody’s report, Banking System Outlook: China, can be purchased here.
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