The main policy risk comes from the possibility that the government will meddle in how the banks lend money in order to help stimulate the economy. This could take the form of marginal borrowers exploiting a relaxation in lending policies. For example, the report adumbrates a situation where funding for infrastructure projects, which will form the backbone of China's recent stimulus package, could occur on the basis of who the project sponsor is, rather than on the viability of the actual project. If this occurs, says the report, it will hold back efforts to build a banking system based on fully commercial principles.
Away from the policy risks, there is corporate lending û exporters with fat inventories and empty order books are likely to contribute to a rise in China's corporate default rate in 2009. The report suggests a historical link between a slowdown in GDP growth and non-performing loans (NPL). So with S&P predicting GDP growth to be as low as 7.3% in 2009, compared to an estimated 9.5% in 2008, bad debts could be on the rise.
On the plus side, the government's $586 billion stimulus package, higher tax rebates on exports and cuts in interest rates could all help boost GDP, thus limiting the rise in NPLs.
On the whole, though, S&P's baseline scenario has the NPL ratio increasing by 204bp, on the basis of a 50% reduction in Ebitda margins and a 300bp cut in the average loan rate. A decrease in the rate of loan growth, which has averaged 14.6% per annum over the past six years, could also contribute to an increase in the NPL ratio.
In the sector's favour are the mark-to-market gains that the banks will accrue from their domestic debt investments over the first half of the year, with a decline in benchmark deposit rates and the excess liquidity in the interbank market pushing up bond prices. Apart from Bank of China, most Chinese banks have little exposure to overseas debt.
The report notes that the sector's fundamentals are strong. Chinese regulations governing the loan-to-deposit ratio combined with the high savings rate have left the country's banks with a good level of liquidity. In November 2008, across the industry, the loan-to-deposit ratio was 65.94%.
Furthermore, the rated banks are well capitalised, especially the ôbig threeö û Bank of China, Industrial and Commercial Bank of China, and China Construction Bank û all of which have been the targets of recapitalisation injections from the government. High levels of capital should ôprovide a cushion against the expected pressure on credit quality and earnings over the next one or two yearsö, says the report.
This is not to say that all is well. The sector will not be completely unscathed by global turmoil, although it should avoid much of the downturn. ôThe sector outlook is now stable, instead of cautiously positive, to reflect our view that the strong positive momentum of the banking sector in recent years will moderate considerably in 2009,ö says S&P.
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