Bangkok--21 Sep--Standard & Poor's
HONG KONG (Standard & Poor's) Sept. 21, 2015--Standard & Poor's RatingsServices said today that it had revised the outlook on China Minsheng BankingCorp. Ltd. to negative from stable to reflect rising credit risks in theChinese economy. We also affirmed our 'BBB' long-term and 'A-2' short-termissuer credit ratings on the bank. We lowered the long-term Greater Chinaregional scale rating on China Minsheng to 'cnA-' from 'cnA' to reflect theoutlook revision. At the same time, we affirmed our ratings on Shanghai PudongDevelopment Bank Co. Ltd. (SPDB: BBB+/Negative/A-2; cnA+/cnA-1) (see ratingslist below).
These actions follow our review of our banking industry country riskassessment (BICRA) on China. We have revised our assessment of the economicrisk trend for China's banking sector to negative from stable.
In our view, credit risks in the Chinese economy may continue to worsen, asevidenced by rapidly rising credit losses and still-significant credit growthamid China's economic slowdown. We believe there is a one-in-three chance thatthe banking sector's credit exposure to nonfinancial and nonpublic sectors inChina could surpass 150% of the country's GDP in the next two years. This isdespite deceleration in China's credit growth, mainly due to dampenedinvestment sentiment, rising risk aversion in shadow banking, and a debtconsolidation plan for the country's local governments. The plan aims toreplace eligible debts of local government financing platforms with bondsissued by provincial governments.
We believe the debt replacement, together with other government measures,should help deleverage some risky segments in the Chinese economy. However,credit losses in the banking sector are likely to surge for the next two yearsat least. Apart from continued elevated credit losses from small and midsizeenterprises in the exports, wholesale, and mining industries, we believe thebanking sector's exposure to large manufacturers, particularly those inindustries with overcapacity, could contribute to higher credit losses. Thefinancial condition of corporate China is getting worse despite thegovernment's consecutive cuts in benchmark rates.
The negative trend in China's economic risk under the BICRA framework couldlead to a lower bank rating anchor and undermine the capital strengths of allfinancial institutions operating in China from a risk-adjusted perspective.
The negative outlooks on the long-term ratings on SPDB and China Minshengreflect a one-in-three chance that we could lower the ratings over the nexttwo years due to a potential elevation in economic risks faced by China'sfinancial sector. The negative outlook on SPDB also reflects our view that the
deterioration in the bank's credit quality could steer it closer to theindustry average for a prolonged period.
We do not expect the negative trend in China's economic risk to affect theratings on other rated banks in China. This is because strong extraordinarysupport from either the Chinese government or the parent groups could besufficient to offset pressures on the stand-alone credit profiles (SACPs) ofthese banks. For some banks with significant capital buffers, we also expecttheir SACPs to withstand the rise in economic risk.
We affirmed the rating on SPDB to reflect the bank's SACP of 'bbb-' and twonotches of extraordinary sovereign support. The SACP reflects the bank'snational franchise, well-recognized brand, moderate capitalization, and longrecord of superior risk position (although it has been under pressure oflate). The rating also reflects SPDB's diverse corporate deposits andsufficient liquidity.
The affirmed rating on China Minsheng reflects the bank's SACP of 'bb+' andtwo notches of extraordinary sovereign support. The SACP reflects the bank'ssatisfactory profitability and business diversity, which its establishedfranchise in the small and midsize enterprise, micro finance, and wealth
management products segments supports. These strengths are tempered by thebank's moderate capitalization and higher credit costs than peers.
We view both SPDB and China Minsheng as having "moderate systemic importance"in China, where we view the government as being "highly supportive" toward thebanking sector.