BEIJING (Reuters) – Chinese banks are expected to face headwinds in fundraising next year as profit-conscious investors cling to the sidelines, expecting a wave of bad loans to crush the sector and erode already declining margins .
The industry is ending its worst annual performance in years after setting aside record provisions over COVID-19, as Beijing urged banks to sacrifice profits to help the economy.
Next year, if lenders put an end to pandemic-related credit losses – allowing borrowers to suspend repayments or pay less in interest – banks will need to bolster their capital against loans previously not classified as non-performing.
Large and medium-sized lenders also need to improve their capital adequacy as demanded by global and domestic watchdogs.
According to data from Fitch Ratings, Chinese banks raised 1.2 trillion yuan ($ 18 billion) in the first eleven months of the year, at the rate of 1.5 trillion yuan for all of 2019.
The 26 listed banks may need to replenish at least 1.25 trillion yuan in capital by 2021, Shenzhen-based broker Guosheng Securities estimates.
“The pressure of raising capital for the entire banking industry is still quite strong,” said Vivian Xue, Fitch’s director of Asia Pacific financial institutions. “China’s largest banks will have to raise significant capital or loss-absorbing debt in the coming years.”
The four largest – Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China – will be short of this 4.7 trillion yuan loss-absorbing debt by the end of 2024 to meet the requirements of the Basel-based Financial Stability Board, said Fitch.
In the scenario, Fitch assumes that risk-weighted assets, including loans, will grow by 8% annually.
The group of 20 major economies adopted “total loss-absorbing capacity” as the standard in 2015 to ensure that the world’s largest financial institutions have the resources for any restructuring, while minimizing support from public funds.
SMALLER BANKS
But China’s more than 4,000 smaller and privately held banks have more acute financing needs, analysts say, despite 200 billion yuan in special bonds from local governments this year designed to help recapitalize regional banks.
“Smaller banks will have a bigger gap,” said Guosen Securities analyst Wang Jian.
Fundraising tools include tier-two bonds, perpetual bonds for larger banks, public equity issues, strategic capital injections, and government-led investments for smaller lenders.
Despite the many options, banks face challenges in gaining investor interest.
“Small banks will struggle to gain recognition from investors,” said Everbright Securities analyst Wang Yifeng.
Investors have been lukewarm to bank IPOs due to their poor stock performance, said Dai Zhifeng, an analyst with Zhongtai Securities.
Shares of mainland banks are down 6.5% this year, while China’s broader market is up 22%.
Concerns about credit risk among smaller lenders, following the Baoshang Bank seizure, have also diminished confidence in capital instruments issued by regional banks, Dai said.
On the private side of fundraising, mainly through deposit products, large lenders will be preferred over regional ones.
Rural and urban commercial banks will find it more difficult to attract deposits due to a weak customer base and regulatory crackdown on high-yield deposits.
($ 1 = 6.5302 Chinese yuan renminbi)
Reporting by Cheng Leng, Zhang Yan and Ryan Woo; Editing by William Mallard