China Is About to Get Serious With Bad Debt

Are Fiscal Policy Measures Working?
  • Banks raising capital to ‘tackle higher loan impairments’: Yap
  • Hybrid sales by finance companies had fallen 38% this year

China’s banks, which dialed down fundraising efforts this year even as bad debts swelled, are making up for lost time. 

Both lenders and the companies set up to acquire their delinquent assets are bolstering their finances. China Citic Bank Corp. last month announced plans to raise as much as 40 billion yuan ($6 billion), while Agricultural Bank of China Ltd., Industrial Bank Co. and China Zheshang Bank Co. are also boosting capital. China Cinda Asset Management Co. and China Huarong Asset Management Co. are poised to tap investors.

"Chinese banks are preemptively raising capital while pricing remains favorable in order to tackle higher loan impairments,” said Nicholas Yap, a credit analyst at Mitsubishi UFJ Securities HK Ltd. in Hong Kong. “Additionally, the mid- and small-sized lenders also need to boost their capital levels as they have been growing their asset bases rapidly, largely through their investment receivables portfolios."

Chinese banks have strained their finances with the busiest first-half lending spree on record, despite having the highest amount of bad debt in 11 years. Still, completed offerings of hybrid capital declined 38 percent after two consecutive years of record fundraising. A rule change in April that requires lenders to make full provisions for loan rights they have transferred is also encouraging the fundraising. BNP Paribas SA said Chinese lenders may be assessing the right time to approach investors.

“We do see a need for them to issue more, and expect them to raise more additional Tier-1 capital, if not this year then next year," said Charles Chang, head of Asia credit strategy and sector specialists at the firm in Hong Kong. “Loan growth continues to be pretty strong. Meanwhile, NPL ratios are ticking up so it would make sense."

China Zheshang Bank said it would raise 15 billion yuan selling offshore preference shares, securities with equity-like characteristics that count as Additional Tier-1 capital. In July, Industrial Bank said it plans to raise as much as 26 billion yuan in a private stock placement to replenish its highest-ranked buffer. Agricultural Bank will sell as much as 80 billion yuan of securities over three years for supplementary Tier-2 capital, the lender said in August.

“Much of the fundraising is also to support their balance sheet growth,” said Liao Qiang, banking analyst at S&P Global Ratings in Beijing. “This is also the reason why asset management companies are engaging in fundraising right now. They need more capital to support more purchases of bad loans.”

China Cinda has sent a request for proposals to banks for its planned 30 billion yuan equivalent dollar-denominated preference share offering, people familiar said last month. China Huarong plans to issue perpetual dollar bonds this month, separate people said in August.

Cinda is set to become the first Chinese asset management company to sell preference shares. So far in 2016, Chinese financial firms sold $24.1 billion of hybrid securities counted as capital, down 38 percent a year earlier, Bloomberg-compiled data show. China introduced stricter capital requirements to meet Basel III standards in January 2013 and Bank of China Ltd. was the first Chinese bank to sell preferred shares in 2014.

Natixis Asia Ltd. sees the big five lenders needing more capital as they take part in debt-to-equity swaps with delinquent borrowers. The French bank estimated in an Aug. 26 report the program would reduce their Tier-1 capital ratio by 3.3 percentage points to 9.1 percent. S&P says such swaps will only be a driver for fundraising when current trials are expanded.

“If it would be implemented system-wide, then you can certainly expect it to be another blow to the banks’ capital,” said Liao at S&P.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE