Chinese banks' NPL ratio rose to 1.59% as at end-September 2015

The gap between delinquencies and NPLs is widening.

Moody's Investors Service says that the asset quality of Chinese banks is deteriorating, as exhibited by increasing levels of non-performing loans (NPLs), significant increase in the formation of 90-day-plus delinquencies and rising credit costs against the backdrop of slowing domestic economic growth.

"The operating environment of the banks is now characterized by slowing economic and credit growth, but financial leverage within China's corporate sector is still rising," says Frank Wu, a Moody's Analyst.

"At the same time the sector NPL ratio has risen to 1.59% at end-September 2015 from 1.25% at end-2014. Moreover, the gap between 90-day-plus delinquencies and NPLs is widening." says Wu.

Wu was speaking at Moody's & CCXI 2016 China Credit Risk Outlook Conference, which took place in Beijing on 1 December and Shanghai on 3 December.

However, there are various mitigating factors to alleviate some pressure, including profitability -- which is good when compared with those of their global peers -- and declining but still robust loan-loss reserves, which provide a solid buffer against losses.

Moreover, the banks' liquidity remains strong, given that they are primarily deposit funded, and loan-to-deposit ratios are still below 75%. 

Meanwhile, capital -- measured as tangible common equity/risk-weighted assets -- although trailing global standards, is adequate. 

In addition, Moody's notes that government support -- focused on maintaining economic, social and political stability -- is strong with significant government ownership stakes in various key banks. 

Chinese banks will continue to be significant issuers in the global debt capital markets and their issuance is driven by both Basel III requirements and the needs of their offshore ventures.