Corruption probes put spotlight on China's bank governance risks: Fitch

How badly will banks be hurt?

The sudden resignation of Mao Xiaofeng, President of China MinSheng Bank, and the investigation into Bank of Beijing's board director Lu Hai Jun, should not have an effect on these banks' Support or Viability Ratings (VRs), says Fitch Ratings. 

However, these events underscore broader issues of governance, management and political risks facing China's banks.

Here's more from Fitch:

Mao's departure from MinSheng, which was announced on 31 January, coincides with local and international media reports that he is the subject of an investigation by the Communist Party's Commission for Discipline Inspection. This was followed by an announcement by Bank of Beijing on 2 February that Lu was under investigation for party "disciplinary violations". There have been other resignations of senior executives at Chinese property and industrial firms which have also been linked in the media to anti-graft investigations.

The direct impact of these management departures on the operations of MinSheng and Bank of Beijing is likely to be limited. In China, company presidents and chairmen can often wield considerable influence, but Fitch believes that MinSheng's strategy is unlikely to change much in the wake of Mao's exit. In the case of Bank of Beijing, Lu is unlikely to have had a significant influence on the bank's operation - he sits on the board as the representative of one of the bank's shareholders, Beijing Energy Investment Holding Co.

However, these events at MinSheng and Bank of Beijing could be a precursor to a wider investigation into corporate management. If so, as far as the financial sector is concerned, it has the potential to enhance transparency and improve governance standards in the long run - which would be credit positive.

Fitch's ratings for China's banks already reflect a degree of risk related to weak corporate governance. Management effectiveness across the system has, up to now, been somewhat offset by business practices common among many banks. With some exceptions, there are no meaningful differences in Chinese banks' operations and aspirations, including a focus on strong growth, developing risk management practices and the potential for authorities to influence credit decisions. A lack of transparency combined with nascent regulatory and legal systems, act as a sector-wide constraint on VRs. This is especially the case owing to the ongoing rapid growth in off-balance sheet activity, where non-loan credit now comprises more than one-third of total financial sector credit. Fitch's VRs for China's banks range from 'bb' to 'b'.

An increasingly challenging operating environment further underscores the need to enhance governance and transparency. A broader macroeconomic slowdown and moderating credit growth are likely to lead to continued asset-quality deterioration in the next few years. This will place pressure on capital at Chinese banks - especially the mid-tier banks - as this comes at a time when profitability is weakening and regulators are instituting requirements for higher capital buffers.