April 21, 2017 / 7:24 AM / 3 months ago

Fitch: Stricter China Bank Regs Credit Positive, Risks Remain

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(The following statement was released by the rating agency) SHANGHAI/HONG KONG/SINGAPORE, April 21 (Fitch) The China Banking Regulatory Commission (CBRC) has issued several notices that point to stronger enforcement of risk-management regulations, particularly with regard to shadow-banking activities. The Chinese authorities continue to rely on rapid credit growth to meet GDP growth targets, which limits their scope to rein in the shadow-banking sector. However, tighter monitoring and enforcement of bank regulations, and greater management accountability, might help to improve governance and contain financial risks, says Fitch Ratings. Shadow-banking activities have become an important source of financial intermediation in China, and the authorities curbing their expansion could hurt the economy. The outstanding balance of wealth-management products (WMP), for example, was equivalent to around 40% of GDP at end-2016, having grown by over 40% per year on average since 2013. Moreover, many borrowers still lack access to traditional bank loans, and rely on shadow-financing to bridge their funding needs. An abrupt slowdown in shadow financing might also trigger liquidity stress or cause acceleration in NPL recognition, as companies' funding sources dry up. The authorities are therefore likely to continue to allow shadow banking to grow, but the recent notices issued by the CBRC signal stronger efforts to limit risks in the banking sector and potential contagion to the broader financial system. The risks flagged in the new releases are consistent with our own long-held views. We believe that high exposure to shadow banking makes banks increasingly vulnerable to strains on funding and liquidity. There were no significant changes to regulations in the releases, but there are now more encouraging signs that enforcement of existing rules will tighten The notices list detailed examples of prohibited practices that have been used by banks to bypass regulatory requirements and distort earnings, asset quality and capital ratios. Irregular business practices that lack transparency were emphasised, particularly those that are widely used in off-balance-sheet WMPs, interbank operations and banks' investment portfolio management. The CBRC also took a tougher tone on management and shareholder accountability, and has levied more severe bank penalties. The regulator has already fined banks CNY190 million in 1Q17, compared with CNY270 million during the whole of 2016. Banks will be required to conduct internal reviews and report the results within the next few months. The regulator will carry out on-site inspections over this period, and banks will have to fix any problems found by year-end. Improvements in governance and transparency should enable regulators to better quantify and manage systemic risks, which would be positive for China's operating environment. However, some small banks that rely excessively on the interbank market and shadow-banking activities could face increased profitability and capital pressures as a result of tighter enforcement. Contact: Jaclyn Wang Associate Director Financial Institutions +86 21 5097 3189 Fitch Ratings (Beijing) Ltd. Shanghai Branch 3401, 34/F, Shanghai Tower No. 479, Lujiazuihuan Road Shanghai, 200120, China Grace Wu Senior Director Financial Institutions +852 2263 9919 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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