Standard & Poor's Rating Services said Wednesday it had raised ratings on seven Chinese financial institutions on the back of improved management, profitability and government support.

But the rating firm stressed that China's banking system remains a high-risk one. It pointed out that more efforts are needed to improve the banks' profitability and risk management, and better handle challenges like government-led micromanagement aimed at cooling down excessive investment in certain sectors.

The long-term foreign currency ratings on state-owned lenders Bank of China Ltd (BOC), China Construction Bank Corp (CCB), and Industrial and Commercial Bank of China (ICBC) were raised to "BBB+" from "BBB-" and the short-term ratings were raised to "A-2" from "A-3". The outlook on the long-term ratings is stable.

The public information (pi) rating on Agricultural Bank of China, one of the "Big Four" state-owned banks, was raised to "BBBpi" from "BBpi".

The rating changes reflect the banks' solid progress in improving their financial profiles, as seen in enhanced risk management processes and improving asset quality, earnings and capital positions. In addition the support of the government is another important factor underpinning the ratings, Standard & Poor said.

"We are confident that the banks will continue to improve on the basis of the existing system," said Ryan Tsang, Standard & Poor's credit analyst.

"Although the micromanagement will have a certain level of impact (on bank performance), the overall trend is for the better, and that's why we moved two notches up," he said, referring to the long-term foreign currency ratings of the BOC, CCB and ICBC.

All of the three banks are preparing for initial public offerings, but that will not significantly reduce government support in the future, he said. The three banks received a combined US$60 billion in capital injections over the past two years.

The long-term foreign currency rating on Bank of Communications was raised to "BBB-" from "BB+", while that on CITIC Group was raised to "BB+" from "BB".

The pi rating for Guangdong Development Bank Co Ltd was raised to "Bpi" from "CCCpi".

But government policies and macroeconomic conditions, including asset and oil price volatility, could have a negative impact on the banks' asset quality and profitability. However, the sector is not likely to be severely effected since the government's increased ability to manage economic conditions is likely to prevent any major policy-induced shock, the company noted.

The amount of loans classified as "requiring attention", which implies the likelihood of becoming bad loans, has increased substantially since last year, a result of both the ongoing micromanagement and tighter loan classification standards, noted Tsang.

The credit tightening in the property market alone is likely to cause an estimated 30 billion yuan (US$3.6 billion) in non-performing bank loans this year, sources said earlier.

(China Daily September 29, 2005)