Moody's: China banks' operating, financial and support parameters affected by recent policy developments

Moody's Investors Service says that its stable outlook on China's banking system reflects the recent policy developments in the country.

"On balance, the developments in monetary policy, financial supervision and market reform will help stabilize the banks' operating environment and liquidity profile," says Minyan Liu, a Moody's Associate Managing Director for the Financial Institutions Group.

"However, the same policy developments could also pressure their profitability, asset quality and support assumptions over the next 12 months," adds Liu.

Liu was speaking at Moody's China Credit Risk Conference in Shanghai on 12 June 2015.

Liu says the recent shifts towards more accommodative monetary and credit policies will help arrest the decelerating trend in the credit cycle.

Nonetheless, overall financial leverage -- as measured by total credit to nominal GDP -- will likely exceed 200% in 2015; indicating a rising level of repayment risk for the system.

On asset quality in particular, Liu says delinquencies are rising, and the banks' overall asset quality metrics have deteriorated, in line with China's slower economic growth. In addition, problem loans will continue to originate from mostly private sector borrowers in cyclical industries such as manufacturing and trading.

Liu also says that the banks' funding and liquidity positions should improve, given the central bank's more accommodative stance on liquidity provision when compared with the stance it adopted in 2013-2014. Further moves by the authorities to liberalize interest rates will also provide the banks with more flexibility to improve their pricing of liabilities to stabilize their funding base.

However, the banks' profitability levels will come under pressure because of narrowing net interest margins from interest rate cuts and deregulation measures, and low growth in fee incomes, as a result of the tighter supervision of their wealth management business and the regulatory limits on fee charges for bank services.

Moody's notes that the higher cap on the banks' deposit rates and the introduction of the deposit insurance scheme, suggest that the country is accelerating its pace of deposit rate liberalization.

Liu pointed out that a key element in Moody's rating of the banks is the level of government support that the banks receive.

While the overall support that the Chinese authorities provide to China's banking system is strong, economic and policy developments -- including the targeted allocation of credit to particular industries and the recently introduced deposit insurance scheme -- will eventually require the government to take a more nuanced and differentiated approach in providing support to individual banks.