S&P maintains the rating of CCB, the third-largest lender on the Chinese mainland, as stable, or BB+, despite the discovery by the National Audit Office of the cases.

S&P said its ratings on CCB, like those on other mainland banks, already incorporate a substantial degree of probable weakness in the banks' credit and other risk controls, although the banks have made progress in improving such controls in recent years.

"The stable outlook reflects the government's capacity to support CCB, its desire to commercialize the bank over the long term, and the bank's continuing improvement in its profile," said S&P in a report.

China's national auditor said last week that CCB was defrauded of 1 billion yuan (US$121 million) worth of mortgage loans, citing a review of the bank's 2001 financial accounts.

The office each year reviews one of China's four largest state-owned commercial banks. Last year, its review of Bank of China discovered a Guangdong branch stole 6 billion yuan over a 10-year period - the largest financial scandal since the founding of the People's Republic of China.

This year, the office also found other improper action at CCB headquarters and its 20 provincial-level branches, including hidden income, unauthorized accounts and illegal loans.

More than 80 percent of its accounting problems occurred in the 1990s and the majority of illegal opera-tional problems occurred before 2001, said the office.

So far, Beijing-based CCB has punished 474 employees related to these malpractice through administrative or financial penalties since the beginning of this year.

"Such weaknesses are expected to manifest themselves through higher levels of impaired assets than those disclosed in official figures, as well as possible misconduct by bank staff," said S&P.

Meanwhile, there would be an increase in cases of misconduct over the next few years as the authorities seek to reform the banking sector and improve transparency, said S&P.

(Shanghai Daily July 1, 2003)