Chinese banks will have their resilience tested in the next few years as operating conditions turn harsher, Standard & Poor's said in a report on Wednesday, as mainland analysts warned that foreign investors are short-selling China's banking sector.
The S&P report said smaller banks are being hardest hit, providing opportunities for larger and stronger banks to strengthen their dominance by absorbing them.
According to the report, a Chinese-bank credit downturn is likely amid the rising delinquencies and tightening net interest margins.
"Damage to the top banks' balance sheets is about to surface because of a slowdown in China's economy since late 2011 and precarious global economic conditions," said Standard & Poor's credit analyst Ryan Tsang.
He said cheap loans associated with the lending spree resulting from China's stimulus package after the outbreak of the global financial crisis helped the banks contain their credit losses in the past few years, but the damage to their balance sheets is about to surface.
"The trigger is coming from the slowdown in China's economy since late 2011 and precarious global economic conditions as the country's gross domestic product growth has moderated to 7.8 percent in the first half of 2012 from average growth of 9 to 10 percent in the past five years," he said.
Tsang warned that the non-performing loan ratio at Chinese banks is likely to rise in the second half of this year and into the next because of weaker economic growth and a big increase in overdue loans in the first half of this year.
Under such circumstances, S&P believes that many larger and stronger banks will see opportunities to snap up smaller and weaker players to strengthen their market positions.
"Top Chinese banks, particularly national banks and large regional banks, could spearhead massive market-driven consolidation, which proved to be hard to achieve in a buoyant market," said Tsang, adding that the consolidation pace will hinge on the sector's credit downturn's severity.
Because of concerns over Chinese banks' asset quality, foreign investment banks like Credit Suisse, JPMorgan Chase and Co, Deutsche Bank as well as CLSA have downgraded their ratings for Chinese banks recently, causing concerns about whether the Chinese banking sector will be the next target of overseas short-selling institutions.
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