SHANGHAI, Sept 7 (Reuters) - Moody's Investors Service downgraded China's fifth-largest listed state-owned lender Bank of Communications (BoCom) on Thursday, citing the impact of higher market funding cost on profitability.
While China's largest five banks heralded a positive second-half after reporting steady margins and a faster profit growth, there are concerns banks with relatively fewer deposits will likely see their funding costs rise.
Moody's downgraded BoCom's long-term and short-term deposit ratings, their baseline and adjusted credit assessment and their counterparty risk, according to a note.
The outlook cut was partly a result of the bank's "weaker funding profile when compared to other state-owned Chinese banks", said Moody's, adding that the lender's deposit franchise was thinner than its peers.
BoCom is also likely to see its profitability hit amid increasing market funding costs, said Moody's.
In a separate note on Thursday, Moody's downgraded two BoCom subsidiaries - Bank of Communications Financial Leasing and BoCom Leasing Development Hong Kong Company Limited - given their reliance on the bank's support.
Chinese banks are set to see a slowdown in lending growth in the second half of 2017, having exhausted most of their annual credit quota amid a regulatory push to bring shadow financing activities to the main loan book, raising the spectre of corporate defaults as financing costs climb.
Moody's rating change for BoCom follows its downgrade of the Agricultural Bank of China in May and comes despite the improved outlook the agency gave China's banking sector in July. (Reporting by Engen Tham; Editing by Himani Sarkar)