On October 27, international rating agency Fitch Ratings took rating action on China's six major state-owned banks, affirming their long-term foreign currency issuer default ratings while upgrading their viability ratings.
The progress of industry reform was the main factor driving the upgrade of the operating environment score and viability ratings for China's banking sector, reflecting dual improvements in the operating environment and operational resilience.
Notably, amid the recent continued adjustment in the capital markets, risk-averse funds have been flowing into dividend assets such as banks, with the share prices of several major state-owned banks repeatedly hitting new highs. This stands in sharp contrast to the performance of leading overseas banks.
In the view of institutional analysts, this global divergence reflects differences in fiscal policy, interest rates, and credit cycles, but as domestic bank stocks are pushed to high levels by safe-haven capital, this divergence also serves as a risk warning.
Behind the Viability Rating Upgrades
In this rating action, Fitch affirmed the long-term foreign currency issuer default ratings of Industrial and Commercial Bank of China Ltd (ASX: None), Agricultural Bank of China Ltd (ASX: None), Bank of China Ltd (ASX: None), China Construction Bank Corp (ASX: None), Bank of Communications Co Ltd (ASX: None), and Postal Savings Bank of China Co Ltd (ASX: None) at "A," their short-term issuer default ratings at "F1+," and their government support ratings at "a," while maintaining a stable outlook on the long-term issuer default ratings.
At the same time, Fitch upgraded the viability ratings of the four major banks — ICBC, ABC, BOC, and CCB — from "bbb" to "bbb+"; upgraded PSBC's viability rating from "bbb-" to "bbb"; and upgraded BOCOM's viability rating from "bb+" to "bbb-."
According to Fitch's official definition, viability ratings measure a bank's or non-bank financial institution's "intrinsic credit worthiness," reflecting Fitch's view on the likelihood of the entity's failure, including extreme scenarios such as default, the need for extraordinary major support, or mandatory write-down of subordinated debt.
Fitch emphasized that viability ratings fully reflect the risks financial institutions face from their operating environment.
So what considerations lie behind this adjustment? Xue Huiru, Director of Asia-Pacific Financial Institutions Ratings at Fitch Ratings, said Fitch has upgraded the operating environment score for China's banking sector from "bbb-" to "bbb," reflecting continued regulatory strengthening, improved credit discipline, and reduced shadow banking risks.
These sustained improvements have enhanced banks' cross-cycle resilience and supported Fitch's October 27 upgrade of the viability ratings for China's six major state-owned banks.
Xu Wenchao, also a Director of Asia-Pacific Financial Institutions Ratings at Fitch Ratings, said: "Despite economic fluctuations, Chinese state-owned banks, with their dominant market positions, extremely strong funding capabilities, prudent asset-liability management, and close ties with the government, have demonstrated stability in profitability and asset quality across different economic cycles. These advantages, combined with the continued improvement in the operating environment, have enhanced these state-owned banks' resilience through economic cycles and supported their viability rating upgrades."
Specifically, Fitch Ratings made the above rating adjustments primarily based on three reasons. First, at the regulatory level, the cleanup and rectification of wealth management products and outsourced investments, as well as the continued disposal of non-performing assets, have improved the transparency of shadow banking activities and reduced contagion risks.
"Wealth management products have become more focused on end investors, and the transition to a net asset value structure and the elimination of cross-holdings among peers have reduced the possibility of implicit guarantees and risk contagion. In addition, China's closer alignment with international regulatory standards has strengthened banks' asset quality recognition and risk and capital management practices," Xue said.
The slowdown in credit expansion and accelerated consolidation of small banks have helped strengthen credit discipline and reduce tail risks. "The year-on-year growth rate of industry loans has slowed from 7% during 2024-2025 and double-digit levels before 2023 to 5% in the first half of 2026," Xue assessed, adding that China's banking sector loan growth during 2026-2028 will broadly align with nominal GDP growth.
Xu also emphasized that the slowdown in credit growth and improvement in credit structure reflect regulatory guidance to curb excessive lending and promote more sustainable economic growth, which should help control systemic risks and stabilize leverage levels over the medium term.
Finally, the steady rise in China's per capita GDP has also contributed to the upgrade of the operating environment score. Xu stated that China's economy is large and diversified, plays an indispensable role in global trade, and has sound external financing conditions. These factors are already reflected in China's "A/Stable" sovereign credit rating and will bring stronger financial and economic stability while supporting the operating environment for Chinese banks.
Taking the four major banks — ICBC, ABC, BOC, and CCB — as examples, among the key factors driving the VR upgrades, their risk profiles, asset quality, and funding and liquidity scores were all upgraded from "bbb" to "bbb+." Meanwhile, ABC's and BOC's capitalization and leverage scores were upgraded from "bbb-" to "bbb" due to factors such as state capital injection, bringing them in line with ICBC and CCB.
PSBC's asset quality score was also upgraded from "bbb-" to "bbb," while its risk profile, capitalization, and leverage scores were raised from "bb+" to "bbb-." For BOCOM, various driving factors improved significantly, with Fitch upgrading its business profile and funding and liquidity scores from "bbb-" to "bbb," its risk profile, asset quality, capitalization, and leverage scores from "bb+" to "bbb-," and its profitability score from "bb" to "bb+."
It is worth noting that in addition to the major state-owned banks, Fitch has this year upgraded China CITIC Bank Corp Ltd (ASX: None)'s long-term foreign currency issuer default rating from "BBB+" to "A-," and took concentrated rating actions on five joint-stock banks, including upgrading the long-term foreign currency issuer default ratings of Industrial Bank Co Ltd (ASX: None) and Shanghai Pudong Development Bank Co Ltd (ASX: None), and upgrading the viability ratings of China Merchants Bank Co Ltd (ASX: None), China CITIC Bank, China Everbright Bank Co Ltd (ASX: None), Industrial Bank, and Shanghai Pudong Development Bank.
Other international rating agencies have taken similar actions. For example, in September this year, due to enhanced resilience of the Chinese economy, S&P took rating actions on multiple Chinese banks: it upgraded four Chinese banks and their core subsidiaries, including BOCOM, Shanghai Pudong Development Bank, China Minsheng Bank Corp Ltd (ASX: None), and Hua Xia Bank Co Ltd (ASX: None) and certain subsidiaries; revised the outlook on China CITIC Bank and CNCB Hong Kong to positive, while affirming the ratings of 15 Chinese banks and their subsidiaries including the remaining five major state-owned banks, and upgraded the stand-alone credit profiles of eight of them.
In its rating report, S&P stated that China's technological progress and substantial financial reserves have strengthened the resilience of the world's second-largest economy and its banking system against economic and geopolitical shocks. Therefore, it adjusted its assessment of economic risks facing China's banking sector, shifting its Banking Industry Country Risk Assessment from group "6" to group "5," which represents lower risk.
Global Banks Show "East Rising, West Falling" Pattern
From a ratings perspective alone, based on differences in macroeconomic environment, market structure, sovereign ratings, and business diversification across multiple dimensions, Chinese banks' international ratings remain overall lower than those of leading commercial banks in Europe and the US.
However, with changes in the international landscape and capital market adjustments, global bank stock prices have recently been moving in opposite directions — A-share bank stocks have risen against the trend, with several major banks repeatedly hitting new highs, while international banks in Hong Kong and US markets have mostly trended downward, with investment returns diverging.
This has also become an important reason why Fitch's upgrade of the six major banks' viability ratings has attracted widespread attention.
Taking the Hong Kong stock market as an example, on October 28, amid rising market sentiment and financial report disclosures, Standard Chartered PLC (ASX: None) and HSBC Holdings PLC (ASX: None) closed up 7.64% and 0.97%, respectively. However, since August, the two have fallen 6.86% and 18.99% cumulatively, with the latter leading declines among Hong Kong bank stocks.
In the US market, HSBC Holdings, Barclays PLC (ASX: None), and others have fallen more than 15% since August, while Deutsche Bank AG (ASX: None), Citigroup Inc (ASX: None), and JPMorgan Chase & Co (ASX: None) have also generally trended downward with volatility.
On the other side, Chinese bank stocks have once again become a safe haven amid market adjustments, with the "seesaw" pattern repeatedly playing out since July and accelerating noticeably in late September. During this period, including the four major state-owned banks — ICBC, CCB, BOC, and BOCOM — multiple bank stocks repeatedly hit historic highs.
Looking first at the A-share market, since late September, the technology sector has entered a rapid decline. In just 22 trading days since September 22, the Shanghai Composite Index fell 6.8%, while the ChiNext Index and STAR 50 both dropped more than 22%. During the same period, the CSI Bank Index rose 3.6%.
Since touching a phased low of 6,602.05 points in early July, the CSI Bank Index has risen 17%, while the STAR 50 fell more than 40% during the same period, with several major state-owned banks achieving cumulative gains of 20% or even over 30%.
Not only in the A-share market, but since September, Hong Kong's technology sector has also suffered heavy losses, with Chinese bank stocks similarly becoming a safe haven in a weak market. Taking state-owned banks as an example, since July, all six major state-owned banks' stock prices have risen more than 20%, with ABC, CCB, and BOCOM all gaining over 26%, significantly outperforming the Hang Seng Index and Hang Seng Tech Index, the latter of which has retreated more than 13% since July.
How should we understand the "East rising, West falling" pattern in global bank stocks against the backdrop of the technology pullback? "Differences in fiscal policy, interest rates, and credit cycles between China and overseas, as well as the market's re-pricing of banks' future earnings and balance sheet risks, have given Chinese bank stocks relatively favorable risk-reward characteristics," said Lin Yingqi, Chief Banking Analyst at CICC (ASX: None), who believes this reflects multiple differences in macro and micro factor pricing.
First, regarding fiscal policy, he said that while both involve government leverage, overseas fiscal expansion faces inflation and rising interest rate pressures, whereas China's fiscal policy focuses more on resolving existing risks, with recent policies such as mortgage interest subsidies and the expansion of PSL rate cuts further supporting credit demand recovery.
Second is the difference in interest rate cycles. "In the early stage of rate hikes, this was favorable for European and US banks' net interest margin expansion, but as rates remain elevated, unrealized bond losses and credit cost pressures have gradually emerged. By the end of the second quarter of 2026, US commercial banks' unrealized losses on bonds were approximately $326.7 billion. In contrast, China's interest rate environment is relatively stable, and in recent years bond investment income has supported bank profitability, while future earnings improvement will depend more on net interest margin stabilization and credit demand recovery," he said.
Finally, he also mentioned the expansion space and risk differences behind credit cycle divergence, as well as earnings and valuation differences. Lin stated that in the first half of this year, US and eurozone banking sectors' net profits grew approximately 21% and 11% year-on-year, respectively, higher than the 3% growth of Chinese listed banks. Overseas banks' profitability remains strong, but this has already been partly reflected in valuations, with Chinese listed banks' A-share and H-share PB ratios lower than those of European and US banks.
However, as domestic bank stocks continue to climb and the technology pullback persists, some institutional analysts have begun to flag risks. A senior investor noted that in the short term, as bank stock prices rise, the high dividend advantage has been significantly weakened, and there are now more cost-effective alternatives available in the market.
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