Chinese banks' asset quality will remain under pressure from economic rebalancing in the next one to two years and their profitability will deteriorate because of increasing interest rate liberalization, Moody's Investors Service Inc said on Tuesday at its annual credit risk conference.

However, most banks have the financial resources to absorb a significant amount of stress, with healthy earnings, loan-loss reserves and capital.

Moody's also expects the government to remain supportive, which contributes to an overall stable outlook.

"Nonetheless, we expect divergence among the banks in terms of their performance as reform and market liberalization continue. We also expect this divergence to benefit the big five banks," said Vice-President Christine Kuo.

The big five banks are Industrial and Commercial Bank of China Ltd, China Construction Bank Corp, Agricultural Bank of China Ltd, Bank of China Ltd and Bank of Communications Ltd.

Those five are expected to perform better than smaller ones because of their greater focus on big borrowers that are more resilient to market downturns and more likely to receive support from the government.

"Moreover, they have entrenched franchises, which attract lower-cost deposits, and very strong liquidity positions, characterized by a low reliance on market-sensitive funds, thereby enabling them to cope, with relative ease, with periodic money market tightness in China," said Kuo.

Last April, Moody's took rating actions on the big five with all banks' long-term deposit ratings remaining stable at A1, except for Bank of Communications, which was upgraded from A3 to A2.

However, the baseline credit assessments, which are the standalone bank financial strength ratings, were upgraded for all five banks.

The upgrade reflected a reallocation of the substantial systemic support available into these banks' ratings.

Moody's is now incorporating more of that support into the ongoing support that benefits the banks' BCAs rather than the component that constitutes extraordinary support, such as would be in the case of bailing out a default.

These major banks are seen as better prepared and more resilient to the challenges awaiting all Chinese banks - rising corporate leverage, accelerating interest rate deregulation, continuing disintermediation and volatile deposit flows.

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