As China's economic growth decelerates and some industry sectors face growing oversupply issues, the risks from China's recent credit boom appear to be rising to the surface for the country's banks, according to Standard & Poor's Ratings Services' recently published annual survey on China's top banks, titled " China Credit Spotlight: Diverging Credit Quality Could Result In Varying Degrees Of Resilience For The Top 50 Banks."

The survey examines the credit profiles of China's top 50 banks by asset size, and assesses the credit outlook for China's banking sector.

"Rising credit costs, compressing interest margins, and growing pressures on noninterest incomes are likely to constitute a triple-hit to bank earnings," said Standard & Poor's Senior Director Qiang Liao. "In particular, we think it is highly likely that the banks could incur substantially higher credit losses in the coming years."

The report suggests that China's top banks will demonstrate varying levels of resilience amid the more challenging operating conditions. The mega banks and national banks appear to be better-placed to withstand China's economic downturn. In contrast, a majority of the smaller players are likely to experience a further weakening of capitalization and some may even witness significantly deteriorated funding and liquidity profiles.

"We believe the top banks, particularly the national and large regional banks, could spearhead massive market-driven consolidation, which proved to be hard to achieve in a buoyant market," said Mr. Liao. "However, the pace of consolidation will hinge on the severity of the present credit downturn."

The report also notes that liquidity management among China's top banks is becoming increasingly strained. "Should those regional banks that have relied heavily on interbank financing suffer severe credit losses and potential depositor runs, we would expect there to be wider negative repercussions for the banking sector as a whole," said Mr. Liao.

This article is part of our "China Credit Spotlight" series, which discusses the credit conditions for China's sovereign, key sectors, top 150 corporates, and top 50 banks.

Standard & Poor's Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world's leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 23 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

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