S&P Sees China Bank Profits Slumping on ‘Massive’ Credit Risks

Chinese banks’ profitability may “slump” over the next few years as the economy falters after lenders built up “massive latent credit risks,” Standard & Poor’s said.

Rising corporate delinquencies, narrower net interest margins and “increasingly strained” liquidity management will test the resilience of Chinese banks over the next three to five years, the New York-based ratings company said in a report today after studying the nation’s top 50 lenders.

China’s 3,800 banks last month reported an increase in total non-performing loans for a third straight quarter, the longest deterioration in eight years, while profit growth slowed to 23 percent in the second quarter from 24 percent in the previous three months. Two interest-rate cuts this year, three reductions in reserve requirements since November and accelerated approvals for investment projects haven’t been enough to reverse an economic slowdown.

“A credit turndown is unfolding in China,” S&P’s Hong Kong-based analyst Ryan Tsang wrote in the report. “Massive market-driven consolidation may be in the cards for many players as credit quality becomes dramatically polarized.”

Morgan Stanley today became at least the fifth bank to estimate that China’s economic growth this year will be 7.5 percent, the weakest pace in 22 years after imports slid in August and industrial production cooled. S&P forecasts the economy will expand by about 8 percent this year.

The borrowers most at risk include local government financing vehicles, property developers and several industries relying heavily on a domestic consumption boom, S&P said. Small regional lenders will be hit the most as operating conditions worsen, according to the ratings company.

China’s top 50 banks, which include some foreign lenders’ subsidiaries, posted a 19 percent annual growth rate in loans from 2006 to 2011, while their off-balance-sheet credits surged 45 percent annually, according to S&P.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net