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--Net Interest Margin Pressures, Declining Profits Seen
     BEIJING (MNI) - Fitch Ratings has maintained its negative outlook on
China's banking sector in 2018, saying it expects the government's continued
regulatory scrutiny to hurt profits. 
     Fitch said in its report, "Fitch 2018 Outlook: China Banks," that net
interest margin pressures and declining profitability would increasingly come
into play for the sector, especially impacting smaller banks. The Chinese
government's crackdown on shadow-banking activities, as well as tighter
regulation in the interbank market, are expected to create drags on
profitability, although also improve transparency and rein in risks, Fitch said
in the report, which was released Friday. 
     Funding conditions for banks are expected to "remain tight," Fitch said,
with bigger state-owned banks playing more significant roles in keeping the
country's smaller banks liquid.
     Fitch said it would consider upgrading the sector outlook if the
government's deleveraging campaign proves sustainable, but added that it was
"uncertain whether the authorities' commitment to addressing financial-sector
risks would be sustained if there was a danger of missing economic growth
targets."
     Despite the fact that credit growth is likely to decelerate next year, "a
decline in system-wide leverage ratios is unlikely, as the drop in shadow
lending will be partly offset by stronger on-balance sheet lending," Fitch said,
adding that total social financing is expected to rise from 260% of GDP at the
end of 2016 to 268% by end-2017 and 274% by end-2018.
     Fitch said the government's deleveraging campaign is not likely to offer a
"quick resolution" in reducing corporate leverage, and warned that the
government's use of debt-to-equity swaps and asset disposals "offer only
temporary rather than permanent deleveraging."
     It also warned of the rapid rise in household leverage, especially in
mortgage loan growth, which was up 26% year-on-year in September. "There is
evidence of consumer loans having been used to support home purchases --
something about which the regulators are increasingly concerned. Fitch expects
tighter regulatory scrutiny over mortgage underwriting in 2018, but overall
mortgage growth should remain strong, in light of lower risk-weights associated
with mortgage loans."
     Fitch said it expected GDP growth of 6.3% in 2018, but warned that "a
sharper-than-expected slowdown in economic activity may spark another round of
stimulus efforts, and run counter to deleveraging efforts."
--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com
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