Standard & Poor's Ratings Services (S&P) believes that the Chinese banking sector will remain stable in 2009, even though it expects the NPL (non-performing loan) ratio to rise by 204 basis points.

Speaking in a teleconference yesterday, S&P primary credit analyst Liao Qiang noted that the People's Bank of China has made a dramatic U-turn in recent months to shift its monetary stance toward an expansionary policy.

"The measures could undermine underwriting standards, and reduce profitability and capitalization (to the lenders)," he said.

However, he pointed out that the moves could mitigate growing challenges for the corporate sector, and believes the problems are not severe enough to result in negative actions on major mainland lenders.

As a result, the organization revised its outlook on the banking sector to 'stable' from 'cautiously positive'. But the remark was made on condition that the government doesn't interfere too much in lending processes.

S&P said mainland lenders will see a drastic rise in NPL as a result of the potential decline in revenue and margins for mainland companies.

Deteriorating exports are expected to trigger a rise in the default rate for mainland corporations.

The organization added that the 4-trillion yuan economic stimulus package will generate borrowing opportunities for lenders, but it can't fully compensate for the reduction in quality private borrowing resulted from the worsening global economy.

Despite the pressure on profitability, the Chinese lenders should be able to register a notable gain from domestic debt investments in the first half of the year in anticipation of a benchmark deposit rate decline and the remaining excess liquidity in the interbank market that will push up bond prices.

Liao said the overall liquidity profile of mainland banks remains strong because of local regulatory ceilings on their loan-to-deposit ratio, which currently stands at 75 percent, plus the country's high saving rate.

Although the reserve requirement of the Chinese lenders saw high fluctuation between June and December, it doesn't pose a real threat to their liquidity profile, he added.

Overall, the capitalization of the Chinese lenders should provide a cushion against the expected pressure on credit quality and earning over the coming one to two years.

The organization believes that maintaining credit quality will be a key challenge for the banking sector.

But Law Ka-chung, chief economist and strategist of Bank of Communications, held a negative view toward the Chinese banking sectors, saying the narrowing interest spread will hurt their profitability.

(China Daily January 8, 2009)