S&P: China banks largely unaffected by subprime

Updated: 2008-02-21 14:49

China's banks will remain largely unaffected by the US subprime crisis, although provisioning levels need to rise to adequately meet any fallout from the next downcycle in credit, said Ryan Tsang, senior director at Standard & Poor's.

Speaking at a teleconference, Tsang said that China's banks need to be vigilant in monitoring loan applications and build up their capital.

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"Chinese banks are providing a higher level of provision than in the past. However the level is not quite sufficient" for the next downturn, Tsang said.

"Banks need to continue to upgrade market risk management," he said.

Tsang noted that although the subprime issue is not a major concern for Chinese banks, the liberalizing of the interest rate environment and the trading band of the yuan will continue to place market risk at their front door.

"They will need to face these risks in a more sophisticated way as they face a more liberalized market," he said.

Tsang said that China's nonperforming loan (NPL) ratio is expected to remain flat over the course of the year on the heels of an expected shake up of Agricultural Bank of China, but may edge up slightly over 2007 levels.

"If we factor in Agricultural Bank of China's reform in 2008, the NPL ratio could come down," Tsang said.

"However, if we exclude that effect, the NPL ratio is likely to be under some pressure."

In terms of default risk, Tsang noted that China's corporate lending sector could present sufficient cause for concern.

"The corporate NPL ratio could jump in 2008 because of the negative inpact of credit tightening on marginal borrowers, resulting in the deterioration of special-mention loans to NPLs and weaker dilution as a result of the slowing loan growth," Tsang said.

Another sector which presents heightened risk is the property sector.

According to Tsang, China's small- to medium-sized property developers are feeling a significant squeeze from the regulator's credit tightening policies.

"China's market has over 56,000 developers and lots of them are under liquidity pressure," Tsang said.

"We haven't yet seen defaults among our rated developers, but smaller companies are facing serious pressures in refinancing," he said, adding that this is presenting larger developers with good buy-out opportunities to increase their landbanks.

Tsang said the market risk appetite of Chinese banks is generally conservative, and risk management, though far from "cutting-edge," is adequate for their uncomplicated market risk profiles, but added that a large-scale deterioration in loan quality could hurt banks' ratings.
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