Moody's: Rated Chinese banks show continued negative performance trend in 1H 2016

Moodys Investors Service says that the 1H 2016 results of its 12 rated listed Chinese banks showed a continued weakening in their overall performance, while some improvements were evident for new problem loan formation, capital and funding in the case of a small number of banks.

At the same time, overall capital and funding/liquidity trends were stable in 1H 2016, but it remains premature to say that the current credit cycle has reached a turning point.

"In particular, asset performance and profitability stayed under pressure, as seen in a rebound in the banks new 90+ days delinquent loans and a continued decline in the annualized return on average assets (RoA)," says Christine Kuo, a Moodys Senior Vice President.

"Moreover, ongoing asset trends in this period exerted credit pressure on the banks, and these trends include their accumulation of corporate risk and their increasing exposure to the housing market," adds Kuo.

Moodys conclusions were contained in its just released report on Chinese banks, "1H 2016 Results: Negative Trends Persist Amid Pocket of Improvement".

On a positive note, the fact that more banks made efforts in 1H 2016 to grow their personal banking and fee-based business could in time lead to better revenue diversification and a reduction in their reliance on corporate lending.

However, this strategy also brings its own risks, and will take time to reach a scale that is both sustainable and can compensate for the current weakness in the banks corporate lending.

During 1H 2016, Moodys notes that Chinas manufacturing, wholesale and retail sectors continued to account for the bulk of new problem loans and the banks also saw higher delinquencies than previous years from the mining and metal sectors and from large borrowers.

In fact, new 90+ day delinquencies for the 12 banks rose to 1.29% of average loans in 1H 2016 from 1.05% in 2H 2015 on an annualized basis.

Furthermore, the continued decline in their annualized RoA -- to 1.21% in 1H 2016 from 1.28% a year ago -- was due to a further narrowing in net interest margins (NIMs) and higher loan impairment charges. Meanwhile, net interest income still accounted for 70% of the banks revenue, and will remain subject to asset and liability repricing following the central banks rate cuts in 2015.

Moodys further notes that while corporate financial leverage remained high and continued to rise, banks faced constraints on their ability to reduce their risk exposures because of concerns that it would trigger corporate defaults and negatively affect the real economy. This situation applied even for borrowers in sectors with significant excess capacity, such as coal mining.

During 1H 2016, more banks stepped up growth in personal lending, leading in turn to greater exposure to the housing sector. At end-June 2016, personal mortgage loans had grown by 16% from end-2015 compared with corporate loans which rose by 4%.

Although mortgage loans have historically shown very low risk in China, the latest originations have likely entailed a higher level of risks on the back of the sharp rise in property prices in recent months. Property prices in Chinas four first-tier cities rose by 31% year-on-year at end-June 2016.

As indicated, overall capital and funding/liquidity trends were stable in 1H 2016, but significant variations on an individual basis were evident, reflecting the banks asset growth strategies.

Most banks reported weaker capital positions at end-June 2016 compared with end-2015, in terms of their common equity Tier 1 (CET1) capital ratios. For some, the decline was temporary, due to dividend payouts in the second quarter. But for others, it was also due to fast asset growth. In this context, there are signs of some banks increasing their reliance on wholesale funding to support asset growth.