S&P’s warning on Chinese property, Russian banks

LONDON: Credit rating agency Standard and Poor’s said on Wednesday that China’s over-priced and over-supplied property market and capital-starved Russian banks were likely to face further downgrades in the coming years.

In two new emerging market-focused reports, S&P said Chinese property ratings were likely to be hit more than other large markets in Asia, while Russian banks in Turkey, South Africa and Brazil also faced difficulties.

S&P said in the property report that ratings in Asia would have “a negative bias” next year because of an expected fall in Chinese and Hong Kong house prices.

The property sector accounts for more than 15% of China’s annual economic output. Since banks provide much of the financing for building and buying, a prolonged downturn poses possibly the biggest risk to the world’s second-largest economy.

“Continuing sluggish sales, rising financing costs, and declining access to funding will hit smaller (Chinese) regional players. As a result, we may see further downgrades, and even defaults, at the lower end of our rating spectrum,” S&P said.

In its banking sector analysis, it highlighted Russia as the big concern from a list of seven top emerging markets that also included China, South Africa, Brazil, Mexico, Turkey and India.

Almost 70% of S&P’s Russian bank ratings have negative outlooks, meaning theirs are roughly a one in three chance of a downgrade in the next two years.

“Russian banks remain the most vulnerable to the current operating difficulties created by Western sanctions and lower economic growth,” S&P said. “The main risks we see for 2015 are capital erosion on the back of rising risk costs and funding pressures.” — Reuters

This article first appeared in The Edge Financial Daily, on November 21, 2014.