Banks' rising leverage poses ratings risks

Rapidly growing leverage and increased exposure to China will slow upward-rating momentum for banks in the Asia-Pacific region, Fitch Ratings said in an Aug 7 report.

The issues could even lead to downgrades should China's economy slow more sharply than expected and weaknesses in its banking system become more widespread, the ratings agency said.

Fitch estimates that private-sector credit in the Asia-Pacific region will reach 148 percent of GDP by the end of 2012, approaching the peak of 150 percent in 1998-99.

Fitch expects leverage in China will continue to rise as credit is used to underpin the economy.

Relaxed underwriting standards, inadequate controls, property speculation and unproductive investments are likely to lead to a rise in bad debt, and Fitch has doubts over whether current credit and economic growth in the Asia-Pacific region can be sustained.

Banks in China have been increasingly unable to match new lending with deposit growth, but they have been able to afford to expand while maintaining sound loan-to-deposit ratios, Fitch said.