Record $175 Billion Due Makes Banks Worst LosersKyoungwha Kim
Banks are leading losses in China’s bond market this quarter as investors brace for a record $175 billion in debt due in 2014 and Standard & Poor’s warns that bad loans will escalate.
Notes issued by financial companies including China Construction Bank Corp. have lost 2.7 percent since the end of June, the most among the sectors tracked by Bank of America Merrill Lynch’s China Broad Market Index. The overall gauge slipped 1.8 percent, more than the 0.1 percent drop for industry securities globally. China’s banks have 1.07 trillion ($175 billion) of bonds maturing in 2014, up from 970 billion yuan this year, according to Citigroup Inc.
Lenders sold more bonds in the past two months after the People’s Bank of China engineered a cash crunch to prevent excessive lending from adding to the risk of defaults by property companies and local governments. Troubled borrowers are struggling to refinance maturing debt as a measure of total financing in the economy slumped for the fourth straight month in July, the longest losing streak in 11 years, and economic growth is forecast to slump to its slowest in 23 years.
“The very aggressive asset growth is a key risk for Chinese banks,” Liao Qiang, a Beijing-based senior director at Standard & Poor’s, said last week. “Credit losses for Chinese banks will go up substantially in the next two years.”
Banking companies offered a combined 23 billion yuan of bonds in July and 15 billion yuan in August, up from an eight-month low of 6.7 billion in June, according to data compiled by Bloomberg. The yield on 10-year bonds issued by AAA-rated commercial banks has risen 57 basis points from the end of June to 5.45 percent, the highest since November 2011, Chinabond prices show. The rate on similar maturity government debt added 53 basis points to 4.05 percent.
Industrial & Commercial Bank of China Ltd., Construction Bank, Agricultural Bank of China Ltd. and Bank of China Ltd., the nation’s four biggest lenders, have announced plans to raise as much as 270 billion yuan by 2015 to retire maturing debt and replenish capital. Their shares are near record-low valuations, and the market is pricing in a return on equity of 9.4 percent, well below the 21.2 percent banks reported in 2012, Mike Werner, a Stanford C. Bernstein & Co. analyst in Hong Kong, wrote in an Aug. 28 report.
“Asset quality is the biggest overhang on China’s banks,” said Cheng Jiaoyi, an analyst at Qilu Securities Co. “We haven’t seen any sustainable recovery of the economy after nearly a one-year downturn. The short-lived rebound won’t help improve borrowers’ financial conditions to repay their debt.”
ICBC Chairman Jiang Jianqing termed as “unfair” what he called investor “noises” on wealth-management products, local-government loans and industries with overcapacity, saying in an Aug. 29 news conference in Hong Kong that they are driving down valuations. China’s exports increased 7.2 percent from a year earlier, more than the 5.5 percent predicted by analysts, the government said on Sept. 8.
Economists predict the world’s second-largest economy will expand 7.7 percent this year, the least since 1990, as the government cuts excess capacity in industries such as steel and cement and tries to move to a model based on consumption rather than on export-driven production. The nation may reduce its target for 2014 to 7 percent, Fan Jianping, chief economist at a state research institute, said on Sept. 7.
China’s four biggest banks, which account for more than 40 percent of all outstanding loans, posted a record net income of 216 billion yuan in the second quarter, an increase of 15 percent from a year earlier, according to data compiled by Bloomberg. The results were clouded by concern defaults may rise and funding may remain tight as non-performing loans swelled 13 billion yuan to 539.5 billion yuan, according to the China Banking Regulatory Commission.
The actual level of soured credit may be higher because banks move loans off their balance sheets by selling them to non-bank financial institutions or repackaging them as wealth-management products sold to savers, Charlene Chu, an analyst at Fitch Ratings in Beijing, said in April.
Wealth management products bring systemic risks and some of China’s lenders have misused interbank deals to skirt regulations, Hu Xiaolian, deputy governor of the People’s Bank of China, said in Beijing on Sept. 5.
China’s credit default swaps insuring the nation’s debt against non-payment have risen 16 basis points this year to 83 basis points yesterday, according to data provider CMA. The yuan, which has gained 1.8 percent in 2013, was little changed at 6.1210 in Shanghai yesterday.
Speculation that China will give banks the freedom to set deposit rates coupled with the cash crunch led to the worst monthly slump in benchmark government securities in almost three years, with the notes due 2023 jumping 32 basis points in August to 4.04 percent, ChinaBond data show. That widened their rate advantage to 125 basis points over similar U.S. treasuries on Aug. 30 from as low as 78 basis points on July 5.
“Banking-sector bonds may continue to underperform,” said Chen Lei, a bond analyst at Guotai Junan Securities Co. in Shanghai. “Ongoing interest-rate liberalization may hurt lenders’ operations, liquidity remains relatively tight for rest of this year and regulators rein in off-balance-sheet activities.”