"Pressures within the banking system are mounting, and this carries important consequences for Chinese banks' future earnings, asset quality, and capital," said Charlene Chu, Senior Director with Fitch's Financial Institutions team in Beijing.
The agency notes that despite a fall in the aggregate NPL ratio for China's listed banks at end-June 2008, there are early signs of a rise in loan delinquencies. The amount of loans recorded as overdue from one day to one year increased almost across-the-board for listed banks in H108, while at the same time the assessment rates for the amount of loan loss reserves that should be set aside for performing loans also rose.
"Certain data is starting to indicate that the benign credit environment of the last few years may be turning, although it remains too early to draw solid conclusions," said Chu.
The agency highlights that recent earnings growth has been primarily driven by two new noteworthy trends evolving out of the tight credit environment, including higher loan pricing and the rapid rise in the sale and re-packaging of loans into wealth management products that are then re-sold to investors. Fitch notes that although sales of these products have helped banks' fee income accelerate at a time when mutual fund sales have plummeted, this activity should be viewed with a considerable amount of caution due to extremely poor transparency and disclosure, and uncertainty about the amount of residual exposure banks retain on the underlying loans that have been sold.
"If nothing else, recent international experience underscores the necessity of clear and transparent reporting by banks, and the hazards of permitting hidden risks to grow," added Chu.
