China's banking system will have its resilience tested over the next three to five years as operating conditions turn harsher, which in turn may trigger a massive industry consolidation, Standard & Poor's Ratings Services said on Wednesday.

 

As the industry faces an increasing number of corporate defaults and a narrowing net-interest margin because of the slowdown in the economy, the damage to banks' balance sheets is about to surface, according to S&P's latest study of China's 50 largest commercial banks by assets.

 

Smaller banks, which are aggressive but unprepared, will be hardest hit by the worsening conditions, resulting in a growing gap between the strongest and weakest banks in China. S&P said that the larger and stronger banks will see a good opportunity to snap up smaller and weaker players to strengthen their market positions.

 

"More and more small banks will choose to build alliances," said Liao Qiang, director of Financial Institutions Ratings at S&P.

 

"We are not expecting mergers right now. But if the credit downturn unfolds, the pressure may lead to mergers."

 

Chen Daofu, policy research chief of the Financial Research Institute at the State Council Development Research Center, said: "The credit scale has expanded rapidly in the past few years, but now its growth is thwarted and there is a rise in the number of non-performing loans."

 

"The market-oriented interest rate reform also puts a lot of pressure on banks," he added.

 

The slowdown of China's economic growth not only affects the country's banking industry, but also casts a shadow on top companies.

 

Although the sovereign credit rating for China remains strong, the credit profile of the leading companies is lagging, S&P said.

 

"The operating performance of these companies is a shining point. But the level of liabilities is relatively high, resulting in high financial risks," said Fu Bei, director of Corporate Ratings in Asia Pacific at S&P. 

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