Fitch: Rising vulnerabilities at China's city commercial banks

Fitch ratings came out with a latest report on the Chinese commercial banks, showing some optimism on the banks’ profitability this year.

Key Quotes:           

“Chinese banks will struggle to avoid further declines in profitability this year if tight market liquidity aimed at slowing further build-up in leverage remains in effect, as it is likely to increase funding costs”

“There is limited scope to pass higher funding costs to borrowers because corporate leverage and associated interest burdens are already high”

“This year, higher interbank interest rates will mostly affect the smaller banks, which tend to be more reliant on wholesale funding facilities, and most vulnerable to liquidity squeezes”

“We expect smaller banks' margins will erode further in 2017 but larger banks, typically net providers of market liquidity, may see margins stabilise or slightly increase”

“Overall we believe banks are targeting a similar pace of credit growth in 2017, in line with our base-case scenario where credit continues to outpace GDP growth over the medium term”