BEIJING - Standard & Poor's Financial Services LLC (S&P), a major international rating agency, gave Bank of China Ltd (BOC) and China Construction Bank Corp (CCB) higher ratings than their US counterparts on Wednesday after it revised rating criteria.

The two major Chinese State-owned commercial lenders were upgraded to A from A-, while the A rating on Industrial and Commercial Bank of China Ltd (ICBC) remained unchanged.

The changes reflect the "very high" likelihood of extraordinary government support for the lenders if they experience financial distress, because the government tends to treat the banking sector as a lever to realize its economic goals, and banks have a "very strong" link with the government, said S&P in separate statements.

Lu Zhengwei, chief economist at Industrial Bank Co Ltd, said the higher ratings compared with US banks reflected recognition of the years of sustained and stable operation of Chinese lenders and confidence in the fiscal stance of the Chinese government.

"However, investors should be cautious about stronger headwinds to the country's further economic growth and risk exposure to European debt crisis among some Chinese lenders, such as BOC," Lu said.

"Rapid bank loan growth often presages asset quality problems. But even though Chinese bank balance sheets have more than doubled over the past several years, there have been few outward signs of difficulties so far," said Lisa Hintz, associate director of the capital markets research group at Moody's Analytics.

"Trading levels for the banks' credit default swaps are in line with those of major institutions in other countries, indicating that as of now, the markets do not view the ballooning of Chinese bank balance sheets as a particular cause for concern for senior debt holders of the banks."

Hintz said one reason that senior bondholders should feel some degree of comfort with Chinese banks is that the banks have been able to raise considerable equity.

Most big US banks, however, were given lower ratings after the criteria adjustment started three years ago.

S&P lowered ratings of Goldman Sachs Group Inc and Bank of America Corp from A to A- on Wednesday, the seventh level of investment grade, and cut Morgan Stanley, Citigroup and Bank of America's Merrill Lynch unit to A- from A, and reduced JPMorgan Chase & Co one level to A.

S&P said the European debt crisis and negative outlook on the US sovereign ratings have influenced the ratings outlook of the banks.

It also reduced UBS AG and Barclays PLC to A from A+, and cut HSBC Holdings PLC to A+ from AA-.

S&P's new criteria put more emphasis on the strength of each nation's banking system, and each country is assigned a grade that serves as a starting point for the nation's banks, according to Bloomberg.

S&P started to review the rating methodology in December 2008 after Lehman Brothers Holdings Inc and Bear Stearns collapsed.

The International Monetary Fund warned in November that Chinese lenders could face systemic risks if credit, property, currency and yield curve shocks took place simultaneously.

In November two major foreign investors in Chinese lenders announced they would dump their holdings, sparking concerns that Chinese banks are losing attractiveness as their asset quality may worsen.

Bank of America Corp said it will cut holdings of CCB to 1 percent after it sold half of its CCB stake three months ago to reduce its holding to 5 percent. And Goldman Sachs raised $1.1 billion by selling shares of ICBC, the third time it cut its holding.

China announced new rules setting tougher criteria for lenders' capital adequacy, provisions, leverage, and liquidity conditions that will take effect at the beginning of 2012. It set a limit on balance sheet loans this year to fend off default risks related to loans to local governments and property developers.

Shares of ICBC, CCB, BOC and Agricultural Bank of China Ltd declined by an average of 26 percent on the Hong Kong Stock Exchange this year, and banking equities ran into turbulence in recent weeks in Shanghai.

CCB shares dropped by 0.85 percent on Wednesday in Shanghai, while those of BOC fell by 1.71 percent.

China Daily

(China Daily 12/01/2011 page13)