China Banking: More Troubled Banks in Focus, PBoC Sets Up Deposit Insurance Company

The PBoC published rules for a deposit insurance plan back in 2015. Then in March came this report from China Daily: New deposit insurance agency in works

China may soon establish an independent deposit insurance agency covering financial institutions that accept deposits from the public, according to some knowledgeable policy advisers.

Necessity being the mother of invention, the PBoC established this deposit insurance company on the date of the Baoshang takeover.

财新： 央行设存保基金公司 从包商行开始探索风险市场化处置

Industrial and commercial registration data show that the People's Bank of China established a deposit insurance fund management limited liability company with a registered capital of 10 billion yuan (hereinafter referred to as the deposit insurance fund company) on May 24. The company's legal representative and executive director are Huang Xiaolong, deputy director of the Financial Stability Bureau of the Central Bank, and Ouyang Changmin, director of the deposit insurance system of the Financial Stability Bureau, is a supervisor.

It is worth noting that it was on the very day when the deposit and insurance fund company was established that the central bank and the bank insurance regulatory Commission jointly issued a notice saying that in view of the serious credit risks of the contractor bank, in order to protect the legitimate rights and interests of depositors and other customers, they decided to take over the contractor bank for a period of one year from now (see caixin.com, "the contractor bank has been taken over by the central bank and the bank insurance regulatory Commission for the first time in 20 years").

In their response to the reporter's question, the central bank and the bank insurance supervisor pointed out that the central bank, the bank insurance supervisor and the deposit insurance fund "guarantee the full amount of principal and interest of individual savings deposits and the freedom of individual access without any change".

Caixin reporter learned that the acceleration of the establishment process of the deposit insurance fund is also closely related to the background of the recent joint takeover of the risks of the contractor's bank by the central bank and the China Banking Regulatory Commission. "In this way, the deposit insurance fund can inject funds into the contractor's bank to purchase all kinds of creditor's rights of the contractor's bank and explore the establishment of a market-oriented financial risk disposal mechanism."

The creation of a deposit insurance company also comes as eyes turn to other troubled banks.

Update: PBOC Sets Up Deposit Insurance Fund Management Company

21st Century: 锦州银行年报“难产”迷雾： 六成收入来自投资 非标、票据占比较高
Sogou: Jinzhou bank annual report "difficult labor" fog: 60% of the income comes from non-standard investment and the bill accounts for a relatively high proportion

With the takeover of a city commercial bank on May 24, the small and medium-sized city commercial banks that delayed the disclosure of financial results attracted market attention.

According to statistics from the China Monetary Network, besides Jinzhou Bank, Baoding Bank, Jilin Bank, Handan Bank and other city banks have all delayed disclosure of their 2018 annual reports. These city banks have attributed the reasons to audit institutions or internal approval procedures.

On April 1 this year, Hong Kong-listed Jinzhou Bank (0416.HK) suspended trading and delayed the release of its 2018 financial report. Two months have passed, so far, the bank has not released financial results and resumed trading.

First note, the banks with delayed reports are all from the Northeast and Hebei province, the area that experienced a significant economic slowdown in the last cycle. Liaoning province, where Jinzhou is located, sank into recession.

Jinzhou bank's income is highly dependent on investment income. By the end of June 2018, over 90% of the bank's income came from net interest income, 61.2% from investment income and 34.5% from loans.

Its investment income is mainly non-standard. Jinzhou Bank's total assets of 748.4 billion yuan as of the end of June last year accounted for 56% of investment assets and less than 1/3 of loans. About 80% of the investment assets have become beneficial right transfer plans, which are also called "non-standard" in the industry.

However, an industry authority revealed that the recent bank custody incident is only a case with special background and reasons. The overall development of China's banking industry is stable and risks can be controlled. However, the bank custody incident has warned some small and medium-sized banks of radical development. Attention must be paid to stable compliance and long-term development.

The last paragraph is immediately followed by:

Secrets of Rapid Asset Growth

From 2013 to 2016, Jinzhou Bank's total assets maintained a high growth rate of more than 40% every year, with the asset growth rate reaching 49.05% in 2016 and falling to 34.20% in 2017. After five years of rapid growth, Jinzhou Bank's asset size has soared from over 120 billion yuan to nearly 720 billion yuan.

In 2018, Jinzhou Bank's asset growth suddenly came to a near standstill. At the end of June last year, its total asset was 748.392 billion yuan, a slight increase of 3.45% over the end of last year.

The secret of Jinzhou Bank's rapid asset growth and stagnation is not traditional credit but investment business.

Surprise surprise, NPLs were understated:

Judging from the credit, Jinzhou Bank's non-performing loan ratio at the end of June 2018 was 1.26%, 22BP higher than that at the end of 2017. The bank said that it was mainly affected by the country's macro-economic uncertainties and some difficulties occurred in the operation of customers in some industries. However, Jinzhou Bank's interest loans reached 3.3%, up 1 percentage point from the end of 2017.

Looking further, the non-performing rate of personal loans in Jinzhou Bank is high, exceeding 4%. As of the end of June 2018, the overall non-performing rate of personal loans in Jinzhou Bank was 4.22%, up 0.19 percentage points from the end of last year. Among them, the non-performing rates of personal consumption loans and personal operating loans were 4.34% and 4.78% respectively, significantly increasing by 3.12% and 0.16% respectively compared with the end of 2017. The NPL ratio of corporate loans was 1.16%, up 0.25 percentage points from the end of last year.

I have two posts related to Jinzhou from late 2015. Bank of Jinzhou Rallies After IPO and also here Rubber Meets Road: Liaoning Bank to IPO in Hong Kong. Considering the headline about non-standard income, the latter post is relevant:

The company's application proof is here: Application Proof, PHIP and Related Materials, Bank of Jinzhou Co., Ltd.

My curiosity got the better of me when I saw the bank is growing 50%+ yoy. I want to see how the bank increased assets to over 300 billion yuan with only 90 billion in loans. What are these assets? They're listed as debt securities classified as receivables. A look at the notes: wealth management products. The bank, as of June 30, had 90 billion lent out in normal banking and 125 billion lent out through shadow banking. Also from the notes: the average yield on their assets rose from 6.04% in the six months ended June 2014 to 7.80% in the six months ended June 2015.

These WMPs and whatever else is lumped in here, have been driving profits. "Interest income from investment securities and other financial assets" constituted 19.5%, 27.4% and 42.6% of interest income in 2012, 2013 and 2014. Note that they're investing in these products, in addition to offering them. Page 28 lists risk factors associated with these products. As of June 30, 2015, these assets were almost 70% of total assets.

They came to market as the prior deflationary wave was completing, a timely IPO if there ever was one. Yet here we are again.