Bloomberg News

China Banks Get Higher Grades Than Most U.S. Rivals by S&P

November 30, 2011

(Updates share prices in fifth paragraph.)

Nov. 30 (Bloomberg) -- Bank of China Ltd. and China Construction Bank Corp. were upgraded by Standard & Poor’s after the ratings firm revised its criteria, giving the Chinese lenders higher grades than most of their largest U.S. rivals.

Bank of China and Construction Bank were raised to A from A-, and Industrial & Commercial Bank of China Ltd.’s rating was maintained at A, according to a statement issued today. The changes reflect the “very high” likelihood of China’s government providing help for the lenders in the event of financial distress, S&P wrote in separate statements.

Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. had their long-term credit ratings cut to A-, while UBS AG and Barclays Plc were downgraded to A and HSBC Holdings Plc to A+. The Chinese banks’ elevation underscores their turnaround since a decade-long overhaul of the state-run lenders that had cost the Asian nation $650 billion by 2008.

“You look at the liquidity conditions in China, they’re very good. You look at the policy impetus, the likelihood of government support, it’s very very high,” Tom Quarmby, an analyst at Barclays Capital Inc. in Hong Kong, said in a Bloomberg Television interview today. “Whilst lending might be higher risk, it’s just lending, it’s not exotic derivatives businesses or investment banking.”

Shares Slide

Shares of Construction Bank fell 2.5 percent to HK$5.17 as of the midday trading break in Hong Kong, while ICBC declined 2.3 percent and Bank of China slid 2 percent. Hong Kong’s benchmark Hang Seng Index retreated 1.9 percent. The three lenders and Agricultural Bank of China Ltd. have declined by an average 26 percent this year on concern that loans may sour as economic growth cools.

Chinese banks’ bad debts may climb to 1.5 percent of total loans by the end of next year and 1.8 percent by December 2013, according to the median estimate of seven analysts surveyed by Bloomberg last month. That compares with 0.9 percent for the third quarter, according to data from the regulator.

China’s central bank has raised the reserve-requirement ratio for major lenders nine times since October 2010 to a record 21.5 percent. That compares with a maximum 10 percent for U.S. lenders, according to the Federal Reserve’s website.

Capital Requirements

China, which has more than $3 trillion of foreign exchange reserves, has pushed its banks to raise capital and limit off balance sheet loans this year on concern some infrastructure companies controlled by local governments and property developers may be unable to repay debt. Central Huijin Investment Ltd., which manages the government’s stakes in China’s biggest lenders, last month began buying bank shares.

The China Banking Regulatory Commission warned lenders earlier this month that some projects backed by local governments may run out of funding and loans to developers are likely to go bad as property sales slow, according to a person with knowledge of the matter.

China’s economy grew at the slowest pace in two years in the third quarter as the government raised interest rates and limited lending as part of its campaign to rein in inflation. Home prices declined in 33 of 70 cities monitored by the government in October.

Shang Fulin, appointed chairman of the banking regulator at the end of October, asked lenders to control risks associated with lending to local government financing vehicles, property development, wealth management businesses and shadow banking, the regulator said Nov. 25.

S&P, a unit of New York-based McGraw-Hill Cos., has been changing the way it looks at debt after its grades contributed to the credit-market seizure that brought down Lehman Brothers Holdings Inc. and Bear Stearns Cos. It started to review the methodology in December 2008, months after the collapse of those two firms.

--Editors: Chitra Somayaji, Nathaniel Espino

To contact the reporters on this story: Joshua Fellman in Shanghai at jfellman@bloomberg.net; Stephanie Tong in Hong Kong at stong17@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net


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