FEBRUARY 3, 2010, 5:28 A.M. ET.
Fitch Scratches an Itch .
By ANDREW PEAPLE
Apres la deluge, the ratings agencies get nervy.
That's one interpretation of Fitch Ratings' decision to downgrade China Merchants Bank and China Citic Bank. Fitch is worried about the strain that a lending splurge last year is putting on their capital positions, even though CMB, for one, is in the process of raising $3.2 billion via a rights issue.
In truth the downgrades are more of a catch-up exercise for Fitch, placing CMB and Citic on the same footing as most Chinese banks. Eleven of the 16 Chinese banks to which it gives an individual rating are now ranked "D'; the others are rated below that.
And Fitch has for some time come across as bearish on the sector. Its analysts have raised concerns about practices like the repackaging of loans into wealth management products, and the way Chinese banks classify loans.
But it's not alone in showing what might seem a surprising caution about the Chinese banks' prospects. Moody's average rating for their financial strength is D-. On that scale, only six countries are worse off, including Iceland and Kyrgyzstan.
The concern all the agencies share is whether recent improvements in the way Chinese banks are run have been enough to ma
tch the huge increase in risk on their balance sheets as a result of last year's lending boom. None are expecting immediate answers: dire warnings of a large rise in non-performing loans at Chinese banks are based on the assumption that the music will stop, and their vulnerabilities will be revealed all at once.In reality, the process could take some time: true recognition of nonperforming loans will likely be delayed by tactics such as rollovers or extra lending to pay off loans gone bad, the sort of practices Fitch has often highlighted.
Its heightened caution now is in truth neither wholly new, nor likely to prove temporary.
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