(Yicai) July 10 -- Even though operating conditions across China's banking sector have yet to show any notable improvement, US-based Fitch Ratings has upgraded five Chinese joint-stock commercial banks, citing government policy support and lower risk appetite among these lenders.

Fitch has lifted the long-term foreign-currency issuer default ratings of Industrial Bank and Shanghai Pudong Development Bank along with the viability ratings of those two lenders as well as China Merchants Bank, China Everbright Bank, and Citic Bank, it announced on July 3.

Since the end of last year, Fitch has raised the LTFC IDRs of three Chinese joint-stock banks and the VRs of six such lenders. The agency's reports repeatedly highlight several key rating drivers, including a reduced appetite for risk, easing asset quality pressures, and stabilizing or improving profitability, reflecting its recognition of the banks' progress in asset quality, capital levels, and business model transformation.

Fitch's decision to upgrade a number of Chinese joint-stock banks came even as first-quarter regulatory indicators showed the domestic banking industry remained caught in a state of “‌sales up, profits down,” Dong Ximiao, chief economist at CMB-China Unicom Consumer Finance and deputy director of the Shanghai Finance and Development Laboratory, told Yicai.

Rating agencies focus on marginal changes in underlying trends rather than financial metrics at any single point in time, Dong noted.

Fitch's upgrades reflect the ability of Chinese banks to execute a strategic transition away from excessive reliance on net interest margins to capital-light business models and more diversified revenue streams, according to Dong. While profitability remains under pressure, the agency acknowledges the progress these lenders have made in actively optimizing their balance sheets and resolving legacy risks, he said.

Although it is difficult for the Chinese banking industry to return to the golden age of high growth, it still maintains a steady development trend, Dong noted. After digesting the historical burden and consolidating the safety cushion of provisions, the high-quality development capability of the industry will likely improve, Dong stressed.

While China’s banking sector is unlikely to return to its earlier "golden age" of rapid growth, it will maintain a broadly stable development trajectory, Dong pointed out. After digesting legacy issues and reinforcing buffers, the industry's capacity for high-quality growth is expected to improve, he added.

Leading banks will consolidate their competitive advantages through stronger risk control and transformation capabilities, while small and mid-sized lenders will achieve sound growth by leveraging low-cost core liabilities, capital-light fee-based income, and prudent asset-risk management practices, he said.

Editors: Tang Shihua, Martin Kadiev