International ratings agency Standard & Poor's or S&P has raised its counterparty credit ratings on seven Chinese banks. The long-term foreign currency rating on the Bank of China, the China Construction Bank, and the Industrial and Commercial Bank of China has been lifted from BBB- to BBB+.
Standard & Poor's says the move reflects the banks' solid progress in improving their financial profiles.
So why has the world's leading rating agency raised its expectations of these banks and what qualities of the banks were valued during S&P's rating process? CRI's Dandan interviewed the agency's analyst and filed this report.
Recently international expectations of the Chinese banking sector have reached new highs, alongside news of China Construction Bank's IPO and foreign banks acting as market makers.
This attitude can be seen at a presentation given by the world famous ratings agency Standard and Poor's on China's four major state-owned banks and three commercial banks.
The categories of ratings set by the agency include long-term foreign currency ratings, public information ratings, and a bank's fundamental strength rating.
S&P's Director and Team Leader for Asia, Ping Chew, explains why the agency revised its ratings on these seven banks at this time.
"It is an appropriate time we do it because of past reform and past restructuring, past capital injection, IPO, even more foreign participation, even more restructuring."
Since the late 1990s, China's government has injected 60 billion US dollars into three major state banks, in order to promote joint stock reform.
The regulator has also lowered the barriers to entry for foreign investors seeking to become strategic partners with Chinese banks.
S&P raised the bank fundamental strength rating on the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China, and the Bank of Communications from D- to C.
According to S&P's definition, a bank rated "C" in this category is considered to have adequate fundamental strength, in the absence of extraordinary assistance or interference from its corporate group, regulator or the government.
Such a bank may still, however, be sensitive to uncertainty and adverse circumstances.
The agency said the banks have improved their performance in enhanced risk management, and in their asset quality, earnings, and capital positions.
However, government support remains an important factor underpinning the banks' ratings. The agency notes also the role of foreign investment in developing effective credit skills in these banks.
Ping Chew elaborates:
"The better credit skill you have, the better you can differentiate whether this company is actually good or bad. The credit skill will ensure that the future loan quality is good or bad. Future loan quality will impact on NPL, profitability, etc. So credit skill is the most important thing that we look at for the bank."
But, the ratings agency said the country's banking sector continues to face challenges, especially city commercial banks and credit co-operatives.
The high ratio of non-performing loans ĘC presently at 25 percent for China's banks - also remains a tough issue in the further improvement of risk control and management skills.
This is Dandan, for Real Time Beijing
(Photo: CRIENGLISH.com/First photo: Ryan Tsang (L), CFA & Director of Financial Services Ratings, and Ping Chew (R), Director & Team Leader, Asia Sovereign, International Public Finance and Financial Services Ratings at the press conference on upgrading seven Chinese banks' ratings in Beijing on September 28, 2005./Secord photo: Ping Chew)