Fitch warns on risks facing China’s banks

Chinese banks' rapid expansion of their assets in the first half of the year amid the current economic gloom might cause loan repayment problems and undermine their solvency, Fitch Ratings said in a report released Tuesday.

Despite the deteriorating economy, Chinese banks have continued to expand their balance sheets rapidly, with system assets rising 11.9 percent in the first six months of the year, the report said.

The assets of China's banking sector will exceed $21 trillion by the end of this year if Chinese banks continue to expand their assets at the same pace, much higher than $9 trillion at the end of 2008, the report said.

The report attributed the expansion of assets in the first half to the rapid growth of interbank borrowing, which rose 29 percent from January to June, compared with a rise in corporate and retail credit of 9 percent. Many interbank assets are actually corporate credit disguised as interbank claims, the report said.

"We have long held the view that such aggressive expansion at a time of weak global and domestic economic fundamentals has the potential to lead to large loan repayment problems, and could ultimately undermine solvency," it said.

"Banks' desire to boost their assets has never waned, due to rising capital demand as evidenced by the recent large-scale local government investment projects," Song Guoliang, a finance professor at the University of International Business and Economics, told the Global Times.

"It creates risk, and bad loans are likely to increase if the economy continues the current downward trend," he said.

While the economy has yet to touch bottom, the report forecast that banks' balance sheets and earnings would deteriorate in the second half of 2012 and first half of 2013, which might lead to a downgrading of some banks' ratings.

Interim reports released by major Chinese banks in recent weeks have already indicated that their earnings and asset quality were declining.

Industrial and Commercial Bank of China (ICBC), the world's biggest lender by market value, reported net profit of 123 billion yuan ($19.37 billion) for the first half of 2012, up 13 percent from the same period in 2011 but a slower rate of growth than the 29 percent rise in the same period last year, the bank said last week.

ICBC's overdue loans reached 62.05 billion yuan as of June 30, up 7 percent from the end of last year.

"Banks' profitability will continue to decline as a result of the two interest rate cuts early this year and a reduction in fees from intermediary business," Lian Ping, chief economist of the Bank of Communications, told the Global Times.