China’s banking regulator set capital targets for the nation’s five biggest lenders above the minimum 11.5 percent ratio amid concern that credit risks may rise, three people with knowledge of the matter said.
Industrial & Commercial Bank of China (601398) Ltd., the world’s largest lender, and three rivals were told last month to maintain capital adequacy ratios of at least 11.8 percent in 2011, one of the people said, declining to be identified as the plan isn’t public. Agricultural Bank of China Ltd. (1288), the nation’s fourth biggest, should target 11.7 percent, two of them said.
The move may help China’s policy makers curb loan growth after inflation accelerated and real estate prices rose following a $2.7 trillion two-year credit boom. The central bank this month raised the amount of deposits lenders must set aside to the highest in at least two decades, while the banking regulator ordered a new round of stress tests on property loans.
“The regulator doesn’t seem comfortable any longer with Chinese banks’ capital levels after their overseas rivals raised money,” said May Yan, a Hong Kong-based analyst at Barclays Capital. “If the target stays at the current level, the banks probably won’t need to worry too much in the next two years as credit growth is already slowing down. But the market will be concerned if the target is pushed higher and higher.”
The regulator also set differentiated targets last month including loan-to-deposit ratios for the five banks, which include China Construction Bank Corp. (939), Bank of China Ltd. (3988) and Bank of Communications Co., following discussions with the lenders, the people said. The watchdog plans to amend those requirements every year, they said.
The China Banking Regulatory Commission “has set differentiated targets and ‘triggers’ on the five banks’ capital levels, with the target for all the banks’ capital adequacy ratios being no lower than the 11.5 percent minimum,” the watchdog said in an e-mailed response to questions yesterday.
The five banks, controlling about half of the nation’s banking assets, raised $56 billion selling shares and convertible bonds last year, giving ICBC a capital adequacy ratio of 12.27 percent and Construction Bank 12.68 percent at the end of December. The level stood at 12.58 percent for Bank of China, 11.59 percent for Agricultural Bank and 12.36 percent at BoCom, according to the companies’ filings to exchanges.
That’s lower than the 14.87 percent average capital adequacy ratio for the world’s 100 largest banks by market capitalization, according to data compiled by Bloomberg.
The banking regulator has stepped up measures to limit systemic risks since last year, including requiring banks to move off-balance sheet assets onto their books and curtailing credit to local governments and the property sector. The government has also raised down payments on second mortgages and ordered local authorities to cap new-home prices in some areas.
There’s a “high likelihood of a significant deterioration” in banks’ asset quality after the two-year credit boom, Fitch Ratings said April 12. Fitch lowered its outlook on China’s long-term, local-currency rating to negative because of the risk that the government would have to bail out its banks. A downgrade would be the first on China’s debt since July 1999.
Wang Zhenning, a press officer at ICBC, and Yu Baoyue of Construction Bank declined to comment. Media officials at the other three lenders also declined to comment, and said the companies’ policies don’t allow them to be identified.
Shares of China banks fell in Hong Kong. ICBC dropped 0.8 percent to HK$6.65 at the 1:00 p.m. break, and Construction Bank lost 0.5 percent. Agricultural Bank fell 1.7 percent while BoCom declined 1.5 percent.
Still the Hong Kong-listed shares of the five biggest banks, which are scheduled to report first-quarter earnings later this week, have outperformed the benchmark Hang Seng Index (HSI) this year. Agricultural Bank is the best performer with a 19 percent advance, followed by ICBC’s 15 percent return.
The central bank has raised benchmark rates four times since October and lifted the reserve ratio requirement for the biggest banks to 20.5 percent to curtail credit growth and inflation. Still, consumer prices rose 5.4 percent in March, the fastest pace since July 2008, and lenders increased new loans last month by a third more than the amount offered a year ago.
China, which holds the most banking assets in the world after the U.S. and Japan, faces economic uncertainties and lenders need to strengthen risk management, CBRC Chairman Liu Mingkang said on April 19. The watchdog that day said it ordered banks to gauge the impact of a drop in housing prices on borrowers’ ability to repay debt.
Construction Bank, Bank of China and BoCom last month were also given a capital adequacy ratio target of 11.8 percent for 2011, one of the people said.
If the capital level drops below the target, the lenders may need to raise capital, slow loan growth or suspend new branch openings and acquisitions to bring the ratio to above the target in 120 days, the person said. If the ratio falls below the minimum 11.5 percent, the banks will have 90 days to bring the level to above the target, the person said.
ICBC, Bank of China and Construction Bank last month said they have no plans to sell stock for as long as three years. Agricultural Bank in March won shareholders’ approval to sell as much as 50 billion yuan ($7.7 billion) of subordinated bonds over the next two years to boost its supplementary capital.
The nation’s banks may have to raise about 860 billion yuan from share sales over six years to meet stricter capital rules, a person with knowledge of the matter said this month, citing estimates from the regulator.
Cut Loan Targets
The five biggest banks had a combined 26.8 trillion yuan of risk-weighted assets by the end of last year, according to the companies’ annual statements. A 10 basis point increase in the target capital ratio would require an additional 26.8 billion yuan in capital, according to Sheng Nan, a Shanghai-based analyst at UOB Kayhian Investment Co.
The biggest banks have already cut their 2011 loan growth targets to the slowest in three years to avoid triggering differentiated reserve ratio requirements. China’s central bank adopted the system this year to align the lenders’ credit growth rates with their capital levels and systemic importance, as well as the nation’s targets for inflation and economic growth.
--Luo Jun. Editors: Chitra Somayaji, Russell Ward
To contact Bloomberg News staff of this story: Luo Jun in Shanghai at +8621-6104-7021 or firstname.lastname@example.org
To contact the editor responsible for this story: Chitra Somayaji at email@example.com