S&P sounds warning on Chinese property sector, Russian banks

Customers look at a model of a new residential compound at a showroom of Longfor Properties, in Hangzhou, Zhejiang province, in this Aug 17, 2014 file picture. Credit rating agency Standard and Poor's said on Wednesday that China's over-priced a
Customers look at a model of a new residential compound at a showroom of Longfor Properties, in Hangzhou, Zhejiang province, in this Aug 17, 2014 file picture. 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. -- PHOTO: REUTERS

LONDON (REUTERS) - 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 per cent of China's annual economic output and banks provide much of the financing for building and buying, so a prolonged downturn poses possibly the biggest risk to the world's second-largest economy.

"Continuing sluggish sales, rising financing cost, 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 per cent of S&P's Russian bank ratings have negative outlooks, meaning there is 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."

Western sanctions directly affect more than half of Russia's bank assets it added, and although the immediate impact should be limited in the short term, the pressure will rise as customers use up or move savings.

"While we expect large banks' ratings to remain tied to the trajectory of sovereign ratings, due to the large state ownership in the banking sector, rating trends for small and midsize banks are likely to mirror their capacity to cope with their increasingly tough operating environment."

Turkish banks, meanwhile, remained vulnerable to a potential downturn in global debt and capital markets due to their large debts, while low growth in South African and Brazil would weigh on their banks.