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Credit growth poses risk to banks: Fitch

CHINESE banks have emerged from the recent financial crisis relatively unscathed on the back of brisk credit growth but hidden risks are still a concern, according to Fitch Ratings today.

In 2009, credit growth for Chinese banks surpassed all forecasts at the start of the year. Fitch expects China's new outstanding loans to reach US$1.4 trillion by the year's end, representing close to 29 percent of China's projected gross domestic product in 2009.

"Credit growth of this magnitude inevitably places a strain on banks' internal risk management, and raises concerns about a future deterioration in loan quality," said Charlene Chu, senior director and head of China bank ratings at Fitch. "The foremost challenges facing Chinese banks and regulators in 2010 will be balancing continued brisk growth amid accelerating capital burn."

Capital ratios for Chinese banks have come under considerable pressure in 2009 from soaring loan growth.

"As a result, banks have ramped up their issuance of subordinated debt, and this is likely to continue into 2010," said Yang Jie, senior analyst at Lianhe Credit Ratings.

Given the extremely low interest rates as a result of the liquidity glut, analysts said that profitability of banks will continue to be burdened.

"The profit margin of the banking sector, which is dominated by large state banks in terms of pricing, is thin even in a good year," said Fitch. "It is likely that profitability for banks will be further subdued in 2010, on the back of tepid corporate credit demand, low interest rate environment, and a lack of major market consolidation."


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