Real estate, export sectors risky to banks

PUBLISHED : Friday, 29 June, 2012, 12:00am
UPDATED : Friday, 29 June, 2012, 12:00am


The mainland property and export-oriented sectors pose the biggest threat to the country's banks in the second half of this year, according to Moody's Investors Service.

China's non-performing loan ratio could rise 1 to 2 percentage points this year, said Christine Kuo, vice-president of Moody's financial institutions group.

Local government financing vehicles, companies set up to borrow from banks on behalf of local governments, also continued to remain as lurking risks, Kuo said.

Last week, Moody's downgraded 15 global banks. The ratings agency does not plan to downgrade Asian banks, as it sees the region's lenders as generally better positioned.

'The rating gap that had long separated banks in Asia from their Western peers has now essentially been closed because of the stable credit quality of Asian banks,' said Stephen Long, Hong Kong-based managing director of Moody's. In contrast to Western banks that had experienced significant credit-quality challenges during the financial crisis, Asian banks were moderately leveraged, conservative in lending and largely deposit funded, Long said.

The fact that Asian banks have captured growth opportunities created by the retreat of European banks from Asia, especially in trade financing, acts as a double-edged sword.

A rapid growth in loans had boosted profits but could also make Asian banks take on sizeable new risks, Long said. 'The biggest risk to the banks is the contagion from the euro area through trade channels.'

A less probable but more damaging risk than euro-zone contagion is a hard landing in China.

'We view a hard landing as one that would be stressful for Chinese banks, requiring significant recapitalisation needs,' Kuo said.

Moody's still envisions a soft landing in China, with gross domestic product growth slowing to 7.5 per cent this year. It carries a stable outlook on the banking system on the mainland and in Hong Kong for now.

While the government wanted to squeeze the bubble out of the property market, Beijing was unlikely to let the whole sector crash, because of its importance to the economy, Moody's said.

Housing investment on the mainland accounted for some 8 per cent of GDP and had wide-ranging secondary impacts on commodity demand, said Stephen Green, China economist at Standard Chartered Bank.

Economists generally take the view that China has much space for policy easing. Peng Wensheng, an economist at China International Capital, said he expected one interest rate cut in August, and perhaps another in the fourth quarter, depending on the overall economy.


The number of global banks Moody's downgraded last week, including Credit Suisse, HSBC and JPMorgan Chase