Chinese regional banks hit by economic slowdown, bad loans soar
BEIJING (Reuters) – Small banks in Chinese provinces hit by Beijing’s efforts to cut excess industrial capacity and curb pollution are hit by a wave of non-performing loans, according to reports from Chinese rating agencies.
Some small lenders in provinces such as Henan and Guizhou have seen their capital ratios drop to near zero or even negative due to the increase in bad debts, according to reports.
The problems facing regional lenders have been masked by the overall weak growth of bad loans in China this year, with large state-backed banks recording faster profit growth.
At least 13 lenders, including 10 rural commercial banks, have had their credit ratings downgraded or their outlook downgraded to negative since early 2017, according to a Reuters analysis of 271 reports issued by several national rating agencies.
Reports attribute the increase in bad loans to small business bankruptcies as the local economy stagnates, as well as the closure of factories and mines as part of Beijing’s campaign to reduce excess capacity and pollution , affecting the ability of companies to repay their debts.
Many small banks are rushing to replenish their capital in order to raise additional funds as provisions against nonperforming loans. The wave of downgrades makes it more difficult for some of them to raise funds on the capital markets.
“Small banks are the main forces in financing small businesses,” said Xu Chengyuan, chief analyst at Golden Credit Rating International Co., “Under capital constraints, they have to cut lending.”
A reduction in credit could have serious consequences for regional economies, Xu said.
So far, the provinces of Guizhou, Henan, Liaoning, Shandong and Jilin have the highest NPL ratios in China, according to Citic Securities.
But the risks could spread to more regions if companies are increasingly affected by Beijing’s financial deleveraging campaign, which has driven up borrowing costs and reduced credit availability, analysts said.
INDUSTRIES IN DIFFICULTY
In Shandong, where industries like coal, steel and aluminum account for 70% of industrial production, the ratings of four regional banks have been downgraded or their outlook has been revised down since December due to the increase in bad debts, according to Reuters analysis.
The non-performing loan rate of one of the lenders, Shandong Guangrao Rural Commercial Bank, jumped to 13.9% at the end of 2017, from 2.47% in 2016, while annual profit fell by 99%. % to 1 million yuan ($ 146,618.97) versus 197 million yuan. during the period.
The bank declined to comment.
According to a report by Golden Credit Rating, the skyrocketing rate of bad and delinquent loans at the bank results from bankruptcies of local tire companies affected by overcapacity and pollution suppression measures.
In southwest Guizhou Province, Guiyang Rural Commercial Bank was demoted by China Chengxin International Credit Rating Co to A + from AA- in June after its bad debt ratio soared 15.41 percentage points last year at 19.54%.
The rise was also triggered by stricter rules on the classification of bad debts imposed by the banking regulator, the rating agency said.
The surge in bad loans has nearly wiped out its regulatory capital, its financial figures show.
The bank’s capital adequacy ratio fell to 0.91% last year from 11.77% a year earlier, while its leading core capital adequacy ratio fell from 8.01% to 1.41%.
In central China, Henan Xiuwu Rural Commercial Bank posted a non-performing loan ratio of 20.74 percent at the end of 2017, up from 4.5 percent a year earlier, according to information from the lender.
With the surge in the bad debt ratio, the bank’s capital adequacy ratio fell from 12.92% to 0.75%.
Appeals to Guiyang Rural Commercial Bank and Henan Xiuwu Rural Commercial Bank went unanswered.
Analysts say stricter classification rules will lead to a further rise in bad loans at smaller banks which have hidden them under the “special mention” category.
The rules, which require banks to classify all loans past due for more than 90 days as non-performing loans, will likely result in a 14% increase in these loans from 2017, and 95% of the impact will trickle down to non-performing loans. medium and medium-sized enterprises. small banks, according to a June report from UBS.
This will result in a 250 billion yuan provisioning deficit, UBS estimated.
BAD RISK MANAGEMENT
Small banks, most of which are unlisted, will have to rely on financial support from local governments and existing shareholders to increase their capital, bankers and analysts say. But simple injections of capital cannot solve the fundamental problem of poor risk management.
Risks are greater in rural commercial banks because they lack the capacity to diversify in terms of geography, sector or customers, analysts say. Many banks are involved in unregulated parallel financings, which allows them to bypass rules that cap a lender’s credit exposure.
Jilin Jiaohe Rural Commercial Bank was demoted from A + to A + in February by Shanghai Brilliance Credit Rating & Investors Service Co, in part because it lent 601 million yuan in phantom loans via fiat products to the Cosun Group, which made default in a high-profile parallel banking scandal. involving 14 financial institutions.
Small banks’ close ties to local governments also push them to support often obscure local government funding vehicles, a source who deals with the products said.
Guosen Securities Co estimates that Chinese banks are exposed to 28 trillion yuan in debt implicitly guaranteed by local governments, including 17.2 trillion yuan in balance sheet loans and 10.5 trillion yuan classified as so-called non-standard investments, which generally refer to parallel investments. ready.
Some local government finance vehicles missed payments due to refinancing difficulties and weak local economic growth, leading regional banks to a bitter fight against rising bad debts and bureaucratic protectionism.
“The local governments had asked the banks to give them money, so we had to do it,” said a banker who requested anonymity. “But now they say ‘why did you lend it to me in the first place'”.
Reporting by Shu Zhang and Ryan Woo in BEIJING; Additional reporting by Andrew Galbraith in SHANGHAI; Editing by Philip McClellan