Credit risks are rising in the mainland banking system, but lenders have sufficient strength to warrant a stable outlook, ratings agency Standard & Poor's said yesterday.
Some loans to the financing vehicles of local governments would probably turn sour over the coming years, but the delinquencies would be absorbable due to banks' good operating profitability, the ratings agency said in a report.
The remarks came amid rising concerns over the quality of loans extended to local governments' financing vehicles, which accounted for 30 per cent to 35 per cent of the 14.2 trillion yuan (HK$16.26 trillion) of new loans disbursed over the past 18 months.
The financing vehicles were set up to facilitate local governments' funding needs because legally such governments are not allowed to issue debt or secure bank loans. Responding to the central government's call to stimulate the economy, local governments unveiled various construction projects and borrowed aggressively from banks by using these funding vehicles.
'It is highly likely that some of these loans will turn bad over the next few years, given the questionable credit quality of many of the borrowers,' said Liao Qiang, a credit analyst with S&P.
Lending to local governments' financing vehicles represents 18 to 20 per cent of total loans in the banking system. These vehicles typically have a high debt or operational leverage. Their lack of disciplined financial policies makes it uncertain whether they will stick to any capital expenditure and funding plans. Moreover, they often generated inadequate cash flow from operations, Liao said.
