Moody said yesterday that the company still retains “stable and positive” opinions on China’s banking industry but it ranks the average financial strength of Chinese banks an E+, the company’s lowest global scale, Oriental Morning Post reported. Moody’s China banking report 2006 titled “Reform and Transformation in an Increasingly Liberalized and Competitive Environment” covers a wide range of topics revolves around the industry’s reform and transformation, analyzing prospect of economy and monitoring, government support, industry’s development phenomenon, reform, profitability, banks’ individual performances, credibility and foreign investment. Moody gives the six major banks of China are given a positive bank deposit rating and long-term obligation rating. Moody’s vice-president and senior analyst, May Yan, said that Moody estimated a strong governmental support to major banks and policy banks that may differ from those given to smaller banks. “Reform of the large banks is on track, while some shareholding banks have introduced strategic investors and are poised for overseas listings,” says Yan, adding, “Moreover, similar reforms have spread to city commercial banks, rural banks and credit coops, while reforms and regulatory initiatives to strengthen operations and lower systemic risk are apparent.” Smaller banks such as the China Bank of Commerce and Bank of Agriculture have already tried to strengthen operation and improve risk management to further discipline and reform the banks’ operations. While the weighted average for Moody’s universe of Chinese banks is A3 for foreign currency deposit and bond ratings Moody gives the average bank financial strength rating of E+, which remains one of the lowest on Moody’s global scale, due to the system-wise weak financial fundamentals including relatively low capital, provisioning and profitability. The sector’s recently improved financials have not been tested by any downturn. Reported NPLs – a major concern for the sector – fell in 2005, largely due to the government’s carve-out of Industrial and Commercial Bank of China’s (ICBC) legacy bad debt. Otherwise, NPL amounts rose a moderate 16.9% YoY at end-March 2006, while NPL ratios were largely flat as banking assets grew rapidly. “However, the banks, particularly the large reformed entities, continue to show very high ratios for special-mention loans, or 2-5x of NPLs. These loans will be vulnerable to changes in economic conditions,” the report says. On the closely watched WTO-mandated opening of the Chinese banking sector, the report says the impact will be gradual and will not cause an immediate system collapse. Foreign banks are likely to target high-end retail and multinational corporates in the more affluent coastal regions, and are unlikely to have any plans to replicate the broad network and clientele of the Chinese banks.