S&P lifts mainland bank outlook

PUBLISHED : Thursday, 27 November, 2003, 12:00am
UPDATED : Thursday, 27 November, 2003, 12:00am

Bad loans are expected to fall sharply, helping lenders to meet world standard

Ratings agency Standard & Poor's has sharply improved its outlook for the mainland banking system, saying it will reach international benchmarks for non-performing loans within five years.

The agency said bad loans would fall from 45 per cent to 15 per cent of total loans in five years, down from an earlier forecast of 19 years.

In addition, S&P has added eight banks, including seven joint-stock commercial banks, to its coverage of mainland financial institutions - albeit with sub-investment grades for all of them.

S&P also noted that all the ratings were 'public information' ratings, which mean the analysis is based purely on published financial information - rather than reflecting in-depth meetings with management.

The new ratings are indicative of the rising importance of the joint-stock commercial banks - dubbed 'second-generation' banks. Their emergence has broken the oligopoly of the Big Four state-owned banks, which control 59 per cent of mainland banking assets.

The mainland's leaner joint-stock banks, held by the central and local governments and the public, hold 14 per cent of banking assets, said S&P credit analyst Ryan Tsang.

Mr Tsang said the more optimistic forecast was mainly due to rising property prices and an increase in the number of loans extended by banks in the first half.

By issuing more loans banks can make their existing pool of bad loans look smaller as a portion of the total - a sleight-of-hand referred to as the 'denominator effect'. However, this tactic can backfire if the new loans turn sour.

Although some analysts are concerned the new loans are feeding a bingeing property market, Mr Tsang said they nonetheless represented an improvement.

'We can view this as a risk, but compared with the policy loans of the past, these have better prospects,' he said.

The agency also factored in a higher 20 per cent bad loan recovery rate into its analysis, compared with an earlier estimate of 15 per cent. In addition, rising bank profits this year are expected to generate more cash for loan restructuring.

The ratings issued yesterday included long-term local currency credit ratings of BB - two notches below investment grade - on China Merchants Bank, Shanghai Pudong Development Bank and Agricultural Bank of China. China Everbright Bank, China Minsheng Bank, Huaxia Bank and Shenzhen Development Bank all received a B rating. Guangdong Development Bank was given a CCC rating.