Credit downturn will deepen for Chinese banks In 2016: S&P

HONG KONG - Chinese banks are likely to face worse-than-expected credit losses and heightened market volatility in 2016, according to Standard & Poor's. "The ingredients for a credit downturn in China's banking sector are coming together,” the rating agency says.

“On top of rising credit losses and compressing interest margins, Chinese banks are facing elevated risks from changes in central government policies," says S&P credit analyst Qiang Liao.

“We expect the sector's nonperforming loan (NPL) ratio to reach 3% by year-end, up from an estimated 2.2% at end-2015 and 1.7% a year earlier.

“This is despite the banks' proactive disposal of NPLs and sizable amount of risky loans being classified as special-mention loans (SML), which by definition still perform but may be vulnerable to adverse economic conditions.

“The rise in reported SMLs was particularly prominent, representing 3.8% of all commercial banks' total loans as of end-September 2015, up from 3.1% at end-2014. www.standardandpoors.com (ATI).