China's top banks face lingering asset risks: Moody's

China's six largest commercial banks will face persistent asset risks in 2019 despite last year’s stable performance in profitability, improved funding structures and strong capitalization, Moody's Investors Service said in a recent report.

The six big state-owned lenders saw higher formation rates of problem assets, but lower stocks of these assets at the end of 2018, the report said.

The institutions in question refer to: Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China, Bank of Communications and Postal Savings Bank of China.

Their problem loan ratios generally improved last year, as the six reported lower non-performing loans (NPL), special mention loans and 90-plus day overdue loans relative to total lending, Moody's noted.

Special mention loans recorded the most pronounced drop from 3.08 percent to 2.67 percent, while their average NPL ratio fell to 1.46 percent at the end of 2018 from 1.51 percent a year ago. The proportion of loans in default over 90 days declined from 1.15 percent to 1.05 percent during the same period.

The ratings agency said that despite the overall decline in problem asset ratios in 2018, formation rates of these assets increased significantly in the first half of the year. Moody’s believed this reflected an increase in economic distress among borrowers and tightening of recognition standards by banks.

These lenders’ capitalization is expected to remain stable in 2019 on their modest pace of asset growth and stable profitability.

"We maintain a stable credit outlook on these six large banks' performance over the next 12-18 months," said Ray Heung, a Moody's senior vice president.

In 2018, the six state banks saw loan growth (8.8 percent) outpace asset growth (6.6 percent).

As for funding structure, the banks also showed improvement in terms of the extension of funding tenor and reduced channeling of shadow banking assets.