Stable outlook for Chinese banks balances deteriorating operating environment: Moody's

The operating environment for Chinese banks is deteriorating as the escalating trade tensions with the United States will add further pressure to the country's economic growth, Moody's Investors Service said in a new report released on Wednesday.

Nevertheless, Moody's maintained its stable outlook for the Chinese banking system on stable liquidity and adequate capitalisation.

"Despite the ongoing trade tensions and slowing economic growth, accommodative government policies will support the asset quality of Chinese banks over the next 12 to 18 months while capital and liquidity also remain adequate," said Yulia Wan, a Moody's Vice President and Senior Analyst.

"However, profitability will weaken on declining asset yields due to looser monetary policy and interest rate reform and continued high credit costs to reflect high corporate leverage and a slowing economy," added Wan in the report.

Asset performance will benefit from the government's accommodative policies, state-owned enterprise borrowers' mostly stable debt repayment capacity and banks' acceleration in non-performing loan disposal.

Stable capitalisation will be supported by internal capital generation capability and strong capital issuance despite fast risk-weighted asset growth. Liquidity will also stay stable on more accommodative policies.

However, the report said, smaller banks face challenges from rising deposit competition and volatile access to the interbank market following the government takeover of Baoshang Bank.

Government support remains high for national franchised and large regional banks because of government policy to maintain public confidence and systemic stability. In the current environment, even small banks could receive support to contain spillover risks for financial, economic and social stability.

.