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December 17, 2009

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Banks unscathed but risks a concern

CHINESE banks have emerged from the recent global financial crisis relatively unscathed on the back of brisk credit growth domestically but hidden risks are a concern, Fitch Ratings said.

In 2009, the credit growth for Chinese banks surpassed all forecasts made at the start of the year. Fitch expects China's new loans outstanding to reach US$1.4 trillion, or 9.56 trillion yuan, by the end of this year, representing close to 29 percent of China's projected gross domestic product in 2009. But Fitch said it was within market expectations.

"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."

Banks in China have issued 9.21 trillion yuan of new yuan loans in the first 11 months this year.

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 in 2010," said Yang Jie, senior analyst of Lianhe Credit Ratings said.

Analysts said profitability of banks will be pressured, given the low interest rates as a result of the liquidity glut.

"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, due to tepid corporate credit demand and low interest rate environment."


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