Professional Documents
Culture Documents
Untitled
Untitled
Untitled
Primary Credit Analysts: Naoko Nemoto, Tokyo (81) 3-4550-8720; naoko.nemoto@standardandpoors.com Qiang Liao, PhD, Beijing (86) 10-6569-2915; qiang.liao@standardandpoors.com
Table Of Contents
1. Credit Growth Is Slowing Down 2. Credit Losses Are Likely To Be Absorbable 3. Preemptive Government Measures Have Reduced Risks 4. Government Support Is Likely To Be Timely Economic Growth Potential Offers Additional Support For China Why China's Banking Sector Could Still Experience Financial Distress Related Research
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 1
1292052 | 300510290
We believe the loan quality of Chinese banks is likely to deteriorate progressively over the next two to three years. Contributing factors include the banks' high exposure to loss-making companies that are saddled with overcapacity as China's decade-long construction boom continues to cool. Tight market liquidity that the central government's measures have induced may further increase the funding costs of corporate borrowers. In addition, the government has spurred consolidation for many industries facing overcapacity.
Table 1
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 2
1292052 | 300510290
Table 1
*Standard & Poor's base-case estimate. Nikkei 225 index for Japan and SSE Composite Index for China. Land price index was used as a proxy. Source: Standard & Poor's BICRA reports based on national and IMF statistics.
A significant correction in the property market would also bite, given the banks' exposure to the debt-laden financing companies of local governments and highly leveraged property developers. In addition, high property prices have weakened affordability levels, and could undermine the credit quality of mortgage loans. The rapid credit expansion in China's regular and "shadow banking" systems highlights the imbalances and credit risks in the Chinese economy. We have long captured such risks in our low anchor rating of 'bbb-' for the Chinese banking system despite the banks' solid financial metrics. The rating implications of a severe deterioration in asset quality may therefore be less pronounced for Chinese banks than for Japanese banks during their crisis years. We lowered our ratings on Japan's major banks to 'BBB+' during 1993-2002, compared with an average of 'AA-' in 1992. We've identified four key differences to Japan that we believe will help China's banks absorb credit losses and reduce the risk of systemic difficulties.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 3
1292052 | 300510290
Chart 1
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 4
1292052 | 300510290
Chart 2
Japan: Capitalization and earnings were weak when the crisis hit
Conversely, in 1990, Japanese banks had to absorb large credit costs with weak capitalization and earnings. And that led to significant shortfalls in capital. The average ROA of all the banks in the 1990s was 0.2% and the average tier-1 ratio was 4.5%. Consequently, banks attempted to improve their financial profiles by reducing costs, expanding fee
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 5
1292052 | 300510290
income, and consolidating to generate economies of scales. Nevertheless, financial institutions began to recover as the domestic economy improved and the Japanese government injected capital.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 6
1292052 | 300510290
enhance their capital in terms of quantity and quality. The government's insufficient financial flexibility was due to a massive fiscal deficit and frequent changes in the political administration. In addition, the public was strongly opposed to providing bailouts for the banking industry, which many perceived to have fueled the bubble. The central bank's loose monetary policy persisted until May 1989. Thereafter, the central bank raised its key policy rate to 6% from 2.5% over a 15-month period. In the grips of the crisis, the Ministry of Finance introduced quantitative restrictions on banks' real-estate loans in 1990 and introduced a 0.3% tax on property holdings in 1992 to curb large property purchases for speculative purposes. Such an abrupt turnaround had overkill effects on the real estate industry and financial institutions. It led to liquidity shortages and a sharp plunge in property prices.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 7
1292052 | 300510290
Chart 3
In our base-line scenario for China, we expect credit losses from shadow banking activities, excluding the wealth management products that banks originated, to be shared among various stakeholders, such as nonbanks, individual financiers, investors, and public entities. We don't expect banks to bail out distressed trust products. But if they did, we would review our assessment of our Banking Industry Country Risk Assessment on China and the stand-alone credit profile of individual banks. That would reflect the banks' larger credit exposure to shadow banking, which we currently estimate at about RMB6 trillion-RMB7 trillion (US$1 trillion-US$1.2 trillion) by end-2013. Even if banks choose not to bail out distressed products, they aren't insulated from contagion risk or collateral damage stemming from credit failures in the shadow banking system. Massive defaults of shadow banking credits could trigger the failure of smaller banks with weaker financial profiles than major banks. That, in turn, could undermine depositor confidence and cause a liquidity crunch in the interbank market. In our opinion, certain parts of the shadow banking sector, notably trust companies, will continue to be the weak link in China's financial system. In Japan, we note the banking sector absorbed most of the credit losses of nonbank sectors by providing financial
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 8
1292052 | 300510290
support to its nonbank affiliates or taking losses as creditors. One of the factors behind the nonperforming-loan problems in Japan was insufficient credit risk management. In response, banks introduced more sophisticated internal rating systems, which enabled them to address borrowers' deteriorating performances at an earlier stage. The banks also reduced their concentration risk, which was high because of their reliance on the real-estate sector or a small number of large borrowers. The Financial Supervisory Agency was set up as an independent supervisory agency. Its aim was to depart from traditional forbearance policy, and enhance information disclosure and loan assessments. The Japanese government has also reformed the Deposit Insurance Law several times. The government has developed an institutional and administrative framework to provide timely support to banks under a systemic crisis. China appears to have taken note from Japan's past troubles. The Chinese government and industry regulators are steering the banks away from the cliff edge. Such caution and preemptive measures suggest to us that a lost decade isn't around the corner. How Japan's Banking Crisis Evolved In the early 1990s, nonperforming loans overwhelmed banks as the economy buckled. That followed plunging prices for land and stock prices, after a prolonged period of rapid growth. The benchmark Nikkei Stock Index surged 5.8x and commercial land prices jumped 2.4x during 1980-1990. Japan's economy stalled to average GDP growth of 1.5% in the 1990s, down from 4.3% in the 1980s (see charts 4 and 5). Industrial corporate entities needed to reduce excessive debt and shed overcapacity, creating problems for the economy. In addition, the labor force started to decline in the early 1990s, and further undermined GDP growth, which was already weak. Japanese banks incurred total credit losses of about 99 trillion (US$950 billion) from fiscal 1992 (ended March 31, 1993) through fiscal 2007 (ended fiscal March 31, 2008). This is equivalent to 105% of their total core operating profits and 285% of their total capital during the same period. The government spent 47 trillion, excluding liquidity facilities, to help banks tackle their nonperforming-loan problem. This is equivalent to 9% of the average GDP for the same period.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 9
1292052 | 300510290
Chart 4
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 10
1292052 | 300510290
Chart 5
Related Research
Banking Industry Country Risk Assessment: China, Jan. 9, 2014 Banking Industry Country Risk Assessment: Japan, Aug. 22, 2013 Why Shadow Banking Is Yet To Destabilize China's Financial System, March 27, 2013 Japan's Lost Decade Offers Lessons For Current Global Turmoil, Dec. 7, 2008
Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 11
1292052 | 300510290
Copyright 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
APRIL 7, 2014 12
1292052 | 300510290