The earthquake impact on China's national banks would be far more manageable than that on the smaller institutions in the affected regions, according a report by Standard & Poor's Ratings Services.

Banks are also likely to suffer more from corporate loans than mortgages, said the report released on Wednesday.

"State-owned commercial banks and joint stock commercial banks in China are expected to be able to withstand the effects on their loan quality as they have far more sizable and diversified loan portfolios," said Standard & Poor's credit analyst Liao Qiang.

Statistics with the China Banking Regulatory Commission show that the aggregate exposure of all national banks to Sichuan Province only accounted for 3.21 percent of their total loan books at the end of 2007.

The ratings on Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Bank of Communications and China Merchants Bank are therefore not affected, said the report by Standard & Poor's.

"On the other hand, city commercial banks, rural credit cooperatives or other grassroot financial institutions with a high concentration of exposure in the hard-hit area will be affected heavily," Liao added.

One of the key factors determining the survival of these institutions is government relief programs. Standard & Poor's currently does not have ratings on any of these smaller institutions.

Direct losses of companies in Sichuan Province have been reported to reach 67 billion yuan (around US$9.7 billion) so far.

"The severity of the impact on loan quality will depend on the geographic concentration of individual banks," said Standard & Poor's credit analyst Ryan Tsang. "The quality of loan portfolios with high concentration of local companies in the hard-hit areas will see a very significant deterioration."

The same is true for mortgage loan portfolios. Insurance is not likely to be a big mitigating factor, because most of the properties either have not been insured, or have no insurance cover for earthquakes, said Standard & Poor's credit analyst Connie Wong.

"The earthquake has caused incalculable losses for many, homeowners included, but we expect the credit cost stemming from mortgages to be minimal for national banks, given the severely hit area is economically less developed and likely to represent a negligible portion of these banks' housing loan books," Liao said.

Nevertheless, the Chinese authorities have been working on how to mitigate the resulting credit risks without further pressuring homeowners.

Aside from direct impacts on the business lines of financial institutions, some small credit cooperatives might have lost all their client data, according to Standard & Poor's report.

"It is an open question if they have back-up systems elsewhere for their data, and for those who don't, it will be very difficult for them to resume operations anytime soon," Liao said.

In addition, loans made for reconstruction may have higher credit risk as rebuilding isn't an easy task.

"A significant portion of these new loans could turn out to be unprofitable because loans of this nature usually come with high credit risk, concessionary interest rate, and high administration cost," Tsang said.

(Xinhua News Agency May 22, 2008)