Announcement: Moody's: Outlook stable for Chinese financial institutions through 2018

Moody's Investors Service says that its outlook for financial institutions in China through 2018 is stable, because of strengthening government regulations on the industry and stable economic growth.

"The government will remain keen on adopting coordinated policy measures to curb shadow banking and interbank activities and to address key imbalances in the financial system," says Sherry Zhang, a Moody's Analyst.

"As for the operating environment, steadying economic growth and recovering commodity prices will support corporate profitability and therefore the asset quality of the financial institutions," adds Zhang.

On the issue of liquidity, Moody's says that liquidity will stay broadly stable, with a tightening bias. In particular, the central bank's increasing use of liquidity facilities will improve its monetary management. And, the banks' funding structures will improve, because of their lower reliance on short-term wholesale funding. However, competition for deposits has intensified.

Moody's conclusions are contained in its just-released presentation on "Financial Institutions China: 2018 outlook".

Moody's holds the following outlooks for specific sectors of China's financial industry through 2018:

Banks — Stable

Securities companies — Stable

Leasing companies — Stable

Asset management companies — Stable

Life insurance companies — Negative

P&C insurance companies — Stable

For the banks, Moody's says that asset risks will stabilize, on the back of improving corporate profit and despite high corporate leverage. However, the risk of delinquencies remains elevated among some highly-leveraged and loss-making borrowers, as they transit to higher borrowing costs amid tighter shadow banking regulations.

The banks' capitalization levels will stay stable, underpinned by slowing asset growth and capital raising, and overall profitability remain under pressure from higher funding costs and lower fee income growth.

System liquidity will remain tight, especially among smaller banks, as a result of regulatory efforts to constrain the growth of corporate and interbank leverage and shadow banking.

Nevertheless, government support will remain strong for major banks, because financial and social stability remain key policy priorities.

On securities companies, Moody's says that these companies will demonstrate healthy liquidity and leverage profiles, and while their profitability will come under pressure, the major securities companies' profitability will remain above that of international peers.

With leasing companies, such firms will show stable asset quality, but pressure is evident in certain sectors. These companies' liquidity and refinancing risks will be slightly mitigated by diversifying funding sources, but their profitability will be pressured by higher funding costs.

As for the asset management companies (AMCs), the country's "big four" AMCs still dominate the AMC market. Economic restructuring continues to support these companies' core business growth, while higher asset prices support the profitability of their core distressed asset management business. The AMCs will also see their liquidity profiles improve, because of the increasing use of long-term funding. Capital will remain pressured by strong asset growth.

Moody's outlook on the life insurance industry is negative because the regulatory clampdown on short-term savings products exposes some insurers to liquidity stress and lowers new business growth. These insures also face higher asset risk, as evidenced by their rising alternative investments and higher concentration risk. Moreover, their profitability is pressured by the high cost of liability and rising business transition expense in relation to tighter regulations.

For the P&C insurance sector, Moody's says that stable new car sales and fast-paced growth in the non-motor insurance segment support premium growth. The sector's capitalization levels remain solid, and increases in alternative investments generate higher yield and higher asset risk. However, the underwriting profitability of smaller insurers is under pressure, against the backdrop of the pricing liberalization of motor insurance.