China's slowdown raises risks for Mainland and Hong Kong banks

HONG KONG - The economic slowdown in China will increase credit risks for domestic and Hong Kong-based banks, according to two new reports released by Standard & Poor's. S&P says signs of distress are spreading to more industries, which will accentuate credit losses. However, it suggests the ratio of nonperforming loans for China banks would stay below 3% this year, even under the downside risk that the Chinese economy grows just 6.1%.

"We believe the bottom of the credit downturn in China may take another two to three years to materialise. Loan growth is moderating, credit losses are
rising, and interest margins are compressing as China's financial reforms accelerate and monetary policy eases," says S&P credit analyst, Qiang Liao.

The report says that Chinese banks may further consolidate their balance sheets through NPL disposals, asset securitisation, and capital issuance. 

"We maintain a stable outlook on the Chinese banking sector, while expecting greater credit divergence in the credit quality of the banks," says Liao.

In the second report, S&P suggests that Hong Kong banks are likely to face a slight profit squeeze this year.

"Many banks recently announced a surge in impairment charges on their mainland-related lending in 2014, and those charges may increase as the
Chinese economy slows further. In addition, volatility in the property market remains a risk to the financial stability in the territory," says S&P credit analyst, Terry Sham.

However, S&P believes Hong Kong banks are sufficiently resilient to overcome these risks, given their firm fundamentals, which include solid
capitalisation and good risk management. www.standardandpoors.com (ATI).