China Banks May Need to Raise $200 to $500 Billion to Cover Bad Debts thru 2018

Some news from the past month:

China ‘bad bank’ Huarong secures $2.4bn pre-listing capital
Another of China’s four big “bad banks” has successfully raised pre-listing capital, with China Huarong Asset Management attracting $2.4bn from investors led by Warburg Pincus, Goldman Sachs and Malaysia’s Khazanah.

Mainland banks’ preferred shares have appeal for analysts
The securities pose some problems. They can only be priced in yuan and the same restriction applies to the dividends. The preferred shares can only be placed with 200 investors, greatly restricting the market.

However, as the outlook for banks' common equity shares is threatened by rising bad loans and an overall slowdown in the sector, the relatively high fixed yields on the preferred shares are becoming much more attractive.

"In terms of whether the market can digest [the preferred shares], well, I'm not worrying too much about that," said Erin Lee, an analyst at Yuanta Securities in Shanghai.

Fund managers and asset management companies are already dumping common shares of mainland banks with the hope of buying into the preferred shares later, she said.

China's Bank of Communications Starts Bond Sale
Bank of Communications Co., the country's fifth-biggest lender, has started meeting overseas investors to sell a type of debt that complies with new global regulations, according to people familiar with the matter. The lender has hired eight banks for the proposed debt offering.

Shadow banking's benefits to China undeniable -c.bank official
China should grasp the opportunity to guide shadow banking to serve businesses with needed financing, while at the same time strengthening regulation of the sector, a central bank official was quoted as saying.

A string of shadow banking defaults, such as that of a 4 billion yuan ($652.18 million) credit product backed by Evergrowing Bank earlier this month, have raised speculation about whether the government will crack down further on the sector.

These just scratch the surface of the funding needs for Chinese banks. Lending is tight because banks know their bad loans are extensive and growing. Short of a major crisis, the banks will have to raise capital in the market, and the amounts could run as high as $200 billion over the next few years. CEBM Group estimates that Chinese commercial banks will need ¥1 trillion in captial, about $160 billion, for every 1% increase in bad debts between now and 2018. Should bad debts rise 3% (which wouldn't remotely constitute a crisis), the banks would need nearly $500 billion in capital.

From QQ Finance: 信贷扩张受限压力空前 银行多渠道补血规模超6000亿

Although the bank refinancing is not surprising, but as a commitment to "blood transfusion" significant funds to support the real economy platform, this bank capital unprecedented pressure.

"Economic Information Daily ( microblogging ) , "Reporters disclosed announcement from China Bond Information Network Statistics found that, as of September 25, there are 27 banks to issue secondary capital debt financing through the inter-bank market, the scale of 307.4 billion yuan, only 8 month, there are 13 banks in September tender bonds fund-raising.

Recently there are six banks have disclosed the preferred stock issuance plans, financing plans up to 340 billion yuan. Bank of Nanjing , Bank of Shanghai, Ningbo Bank also announced a private placement program, will raise about 8 billion yuan, 65 billion yuan, 3.2 billion yuan, a total of 17.7 billion yuan. A rough calculation, this year the bank's "blood" program has reached 665.1 billion yuan, almost twice the size of 2013's.

Vice chairman of the NPC Financial and Economic Committee Wu Xiaoling pointed out that "we now want to have more bank loans to serve the national economy, but bank lending is risky capital constraints, there are constraints capital adequacy ratio, the bank is now constantly through capital markets to obtain capital and credit is to cope with the expanding needs of a large part of bank profits should be used to boost its capital, to be used as future credit expansion capital, therefore, the bank recapitalization The first is to assume future further providing loans to community needs, on the other hand want to do for the future bad debt write-off to prepare the economy. "

In the case of bank capital pressures restrict lending, as well as industry experts believe that China's financial system, the existence of structural imbalances, excessive reliance on bank lending to the real economy, the indirect financing model is no longer sustainable.

Not long ago, "Economic Information Daily" reporters from more research learned that this year behind directional loose credit policy, banks did not increase lending, reason, bank executives generally believe that the economic downturn has control of risk need to find a good credit direction is not easy, but more important aspect is that capital pressures to some extent, restricted the lending power of banks.

Jiangsu Bank Vice President Zab book on frankly, "State to the bank for small and micro, rural finance business provides a lot of support, including refinancing, directional drop quasi bank sources of funding has been some relief, but in addition to the bank to lend money liquidity, capital adequacy ratio as well as the constraints, which is one of the major constraints in the form of loans to be occupied capital, therefore, able to withstand the high cost of financing the industry, such as real estate, financing platform and so is taking the channel , financial channels, which do not take up bank capital. "

However, this year, bank regulators to tighten non-standardized debt financing channels, on the banks balance sheet to hide the size of credit constraints, the bank had to return to the table to do it through credit financing business, which to some extent also increased the supplementary capital urgency.

From the Bank's current "blood" channel view, then replace the subordinated debt, secondary debt capital to be the most convenient choice for the channel, and the issue began to surge significantly from the second quarter, to reach a small peak in August. In agriculture, industry, construction, delivery of the five lines focused on August issue of Tier II capital bonds in the inter-bank market, were 30 billion yuan, 30 billion yuan, 20 billion yuan, 20 billion yuan, 28 billion yuan, total raised owned 128 billion yuan. In addition, the listed banks as well as CITIC Bank , China Bank , Industrial Bank , China Everbright Bank , China Merchants Bank , Ping An Bank (issued two), have issued two capital bonds, respectively, 37 billion yuan, 10 billion yuan , 20 billion yuan, 16.2 billion yuan, 11.3 billion yuan, 15 billion yuan, 109.5 billion yuan fund-raising total.

In preferred stock, ICBC, Agricultural Bank of China, Bank of China, Shanghai Pudong Development Bank plans, Industrial Bank and Ping An Bank disclosures show will be raising 80 billion yuan, 80 billion yuan, 60 billion yuan +65 million dollars , 30 billion yuan, 30 billion yuan, 20 billion yuan, 340 billion yuan fund-raising total will be. Which, this year, the Bank plans to raise an amount not more than 32 billion yuan; Shanghai Pudong Development Bank plans to raise no more than 15 billion yuan; Industrial Bank plans to raise no more than 13 billion yuan.

Market analysts believe that the current banking sector overall ROE (ROE) levels at 20%, profit growth of more than 10%, enough to cover 5-10% preferred stock issuance costs, and the level of capital replenishment demand is more urgent , issued preferred stock is expected to fill the bank other tier one capital shortfall over 200 billion yuan, the secondary market to ease refinancing pressure bank stocks, but also help to improve the valuation.

In addition, it is worth mentioning that the upward trend in non-performing loans of commercial banks obviously, the first half of 2014, the balance of non-performing loans of 694.4 billion yuan banking financial institutions, compared with late last year increased by 102.3 billion yuan; NPL ratio 1.08%, compared with year-end 2013 growth of 8 basis points. In this case, banks write off bad loans increased efforts are unprecedented, 16 listed banks to write off bad loans during the first half of this year amounted to 71 billion yuan.

The latest report of market research firm Moneta noted that "through 2018 16 listed banks capital shortfall of 800 billion, commercial banks overall funding gap estimated in about 1.2 trillion .2018 years than the current level of bad debts in the banking system per high a percentage point, the bank will need about one trillion yuan of funds to write off bad debts, the banking system if the 2018 default rate rose to 3%, commercial banks generally require supplementary funding may be around 3 trillion from the point of view to solve the problem of poor credit crunch and banks are required to undergo a relatively long-term process. "

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