Chinese Banks Raising Capital as Default Wave Begins

The China Banking Industry Association put out a report highlighting capital adequacy risk in urban commercial and listed banks. There is no problem at the moment, but the trends in regulations, NPLs, deposits, financial disintermediation and Internet competition are all moving in the wrong direction.

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Although the capital adequacy ratio of commercial banks reached a stage high of 13.65% at the end of 2017, the overall capital adequacy level of the industry was higher. However, since 2018, more and more new regulatory regulations have linked the upper limit of business scale to net capital/net assets, which actually increased the capital requirements of banking institutions at a certain scale. In addition, the new regulations for asset management have officially landed, with stocks. Non-standard entry will also bring additional capital consumption.
There are serious shortages of banks “other Tier 1 capital”

The "Report" pointed out that state-owned large banks are more advanced in capital adequacy. The capital adequacy level of rural commercial banks is middle, while the capital adequacy level of city commercial banks and listed banks is relatively low.

“The capital management of listed banks generally has problems such as the continuous decline of the core tier 1 capital adequacy ratio, the unreasonable capital structure, and the single capital replenishment model.” The “Report” pointed out that many banks issue or plan to issue exogenous capital replenishment tools. Preferred stocks and tier 2 capital bonds have the highest frequency, followed by convertible bonds, and are still dominated by traditional tools. In 2017, 41 listed banks of A-shares and H-shares issued a total of about 169.921 billion yuan of preferred stock, 232 billion yuan of secondary capital bonds, a total of 40 billion yuan of convertible bonds, and 18.1 billion yuan of non-public offerings.

As of the end of May 2018, eight A-share banks have announced the issuance of convertible bonds.
But who wants to buy a secondary offering when they can buy the bank assets at a 60 percent discount in the market?
Zeng Gang, deputy director of the National Finance and Development Laboratory, pointed out that banks are facing a capital supplement dilemma. First, due to the strengthening of supervision, the business returns to the table. It is a challenge to the bank's capital to withstand the off-balance sheet business. Second, at the beginning of the year, we began to strengthen equity management. Some over-equity shares that do not meet regulatory requirements need to be phased out. It is also difficult to find suitable counterparty counterparties. Third, the valuation of the banking industry is basically at a historically low level, which is extremely unfavorable for bank capital replenishment. "The listed company's P/B ratio has fallen to 0.6. If you do financial investment in the secondary market, it is cheaper to buy bank stocks than to increase."

As of the end of 2017, the core tier 1 capital adequacy ratio, tier 1 capital adequacy ratio and capital adequacy ratio of China's commercial banks were 10.75%, 11.35% and 13.65%, respectively, which was 2-3 percentage points higher than the regulatory standards. Although the overall capital adequacy level of commercial banks is higher than the regulatory indicators, there is a structural imbalance. The core tier 1 capital adequacy ratio and the tier 1 capital adequacy ratio of some small and medium-sized banks are consistent or almost identical, indicating that their “other tier 1 capital” is seriously insufficient. The Report also suggests that it is necessary for regulators to further introduce more innovative capital instruments that complement “other Tier 1 capital”. In addition, support banks to enter the broader domestic and foreign capital markets, such as supporting Chinese banks to explore international capitals such as London, Singapore, Dubai and other countries to issue RMB-denominated overseas preferred stocks, Islamic bonds and other capital replenishment tools. Commercial banks should also pay attention to capital management.
NPLs remain very low (officially).
As of the end of 2017, the balance of non-performing loans of commercial banks was 1.71 trillion yuan, and the non-performing ratio was 1.74%. It was stable at this level for five consecutive quarters, but it still needs to focus on the risk exposure of some regions and industries. The report believes that the banks in 2018 Industry credit risk management still faces many challenges, but the quality of commercial banks' assets is expected to continue to maintain a stable and good trend.

In terms of its ability to withstand risks, the balance of loan losses for commercial banks at the end of 2017 was 3,094.4 billion yuan, and the provision coverage ratio was 181.42%, an increase of 5.02 percentage points from the end of 2016. The overall risk-rewarding capacity was enhanced.

"For some time to come, the risk challenge is still very serious for the banking industry. We estimate that the NPL ratio will continue to rise slightly in 2018." Zeng Gang pointed out. The current supervision and intensified assessment, the tightening of the financing environment has led to an increase in liquidity risk, and this year's physical financing difficulties are more severe. In addition, the promotion of structural reforms on the supply side, the rise in environmental protection costs, and even the current trade frictions will have a significant impact on the impact of the enterprise.
Deposits are growing, but remain a concern. Savers are shifting their money into demand deposits:
In 2017, the total debt growth rate of commercial banks was only 8.4%, which was nearly half of the growth rate of 16% in the same period of 2016.

Affected by the strengthening of supervision, the bank's non-deposit liability business has adjusted significantly. At the end of 2017, 26 listed banks and other financial institutions deposited a total of 1,366.57 billion yuan, a year-on-year decrease of 11.68%, a sharp drop. The deposit business is under increasing pressure. As of the end of December 2017, the balance of RMB deposits of financial institutions was 167.1 trillion yuan, an increase of 8.65% over the beginning of the year. Among them, household deposits accounted for 39%, non-financial companies accounted for 34.2%, government deposits 18.3%, and non-bank financial institutions 8.5%.

The trend of “demand” deposits is also obvious.

Lian Ping, chief economist of Bank of Communications, pointed out in the report that the pressure on deposit business still exists in 2018. The active fiscal policy superimposed and regulated fiscal deposits. The residents added leverage for two consecutive years, which will give banks financial deposits, social deposits, and residents. Savings deposits put a lot of pressure on them. In addition, the slowdown in bank asset expansion will also constrain the ability to create deposit, deepening financial disintermediation, and permeating Internet finance are all increasing pressure. Commercial banks should actively increase the diversification of funding sources.

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