Chinese banks face a higher risk of a deterioration in asset quality and this may lead to a "sluggish landing" for the economy, Credit Suisse Group AG said Monday.
Lenders face a larger-than-expected "credit overhang," analysts led by Credit Suisse's Vincent Chan wrote in a report.
They cut their ratings on banking shares to "underweight" from "overweight," while increasing utilities to "overweight" from "market weight."
"China's credit-to-gross domestic product ratio has risen to alarming levels in the past two years due to massive off-balance-sheet financing, and raised a red flag for future asset quality problems in banks," the report said.
"Connecting the new lending data with decelerating GDP growth, tight liquidity and higher interest rates form the recipe for loan-book stress."
Banks in China issued a combined 17.6 trillion yuan (US$2.7 trillion) of new yuan-backed credit in 2009 and 2010. New yuan loans totaled 3.6 trillion yuan in the first five months of this year, down 12 percent from the same period last year.
Inflation rose 5.5 percent in May, a 34-month high.
Gianvito Lanzolla, an associate professor at Cass Business School of City University London, said inflation is not welcomed in China.
The central government has steadily increased credit controls during past few months to slow inflation.
Credit Suisse has cut its GDP growth forecast from 8.9 percent to 8.5 percent in 2012.
Most of the country's new lending in the past few years was invested in major rail and highway construction projects, which may have potential credit risks, Liao Youming, a vice commissioner of discipline inspection at the China Banking Regulatory Commission, wrote yesterday in a commentary published in the Financial News, a newspaper affiliated to the central bank.
