RPT-Government on hook for China banks' shrinking capital – Reuters


(Repeats Monday story with no changes)

* China banks start reporting H1 earnings this week

* Banks’ profit growth seen flat, capital ratios falling

* Banks under pressure to lend more, write down bad loans

* Small banks’ capital near new regulatory lower limits

* First examples of recapitalisation already beginning

By Sumeet Chatterjee

HONG KONG, Aug 22 Hit by bad loans, Chinese
banks are expected to show a weakening in their capital strength
in first-half earnings, raising the prospect that government
might have to inject more than $100 billion to shore them up,
according to some analysts.

There are early signs that government is already taking
action to help some of the smaller banks, which are struggling
to maintain their capital ratios as China’s economy slows,
interest margins fall, and bad debts climb.

“We believe the recapitalisation and bailout process is
already discretely underway. However, it has gone unnoticed as
it has started with the smaller, unlisted banks,” said Jason
Bedford, sector analyst with UBS.

“We expect this process to accelerate sharply in 2017,
particularly among listed joint stock banks,” Bedford told
Reuters, adding closing the capital shortfall would require an
infusion of $172 billion.

The largest banks, including Agricultural Bank of China Ltd
and Bank of Communications Co Ltd, start
reporting earnings this week, and brokerage Daiwa estimates
sector-wide profit growth in the first six months of 2016 will
remain at just 0.7 percent.

In the April-June quarter, the banking sector’s core capital
adequacy ratio, on average, declined by an average 27-28 basis
points from the preceding quarter, Daiwa said in a report,
citing data released by the regulator.

Bedford said in a report earlier this month that fundraising
by smaller banks was partly driven by local government pressure
to maintain credit growth and cushion the economic slowdown.

At the same time, the banking regulator wants banks to clean
up their balance sheets by providing more for doubtful loans and
cutting exposure to shadow lending, which for weaker banks could
require extra capital or mergers with the strong.

While the country’s top five banks had a substantial capital
buffer of around 14 percent at the end of 2015, smaller banks
are sailing much closer to the wind, putting the sector’s
weighted average Tier 1 capital at 10.69 percent at end-June,
down from 10.96 percent a quarter earlier.

That is barely above the 10.5 percent minimum that the banks
in China would need to achieve by 2018.

China Banking Regulatory Commission did not respond to
requests for comment.

BAD DEBT HANGOVER

Roshan Padamadan, equities fund manager with Singapore-based
Luminance Global Fund, expects China’s banks will need about
$100 billion a year over the next few years, while Wei Hou,
senior equity analyst for China banks at research firm Sanford
C. Bernstein in Hong Kong, estimates they will need $75 billion
over the next year.

“If … government or the bank management teams decide to
take a big bet and write off most of the bad loans in the next
year or two, then that will create much higher capital pressure
for mid and smaller banks,” Hou added.

Chinese banks’ non-performing loans are at nearly 2 percent,
the highest since the global financial crisis in 2009, according
to the CBRC, but some analysts believe the ratio could be
between 15 and 35 percent, as many banks are slow to recognise
problem loans or park them off balance sheet.

Not all analysts think the banks will need government cash.

Of the 10 China-focused analysts and fund managers who spoke
to Reuters, three, including a leading global credit rating
agency, said the lenders could avoid it by repackaging
non-performing loans into marketable securities.

If they do need funding, however, they will struggle to
persuade private investors to part with their cash, as most
Chinese bank shares are trading below the book value of their
assets, and rating agencies have a negative outlook on the
sector.

That leaves government on the hook for capital shortfalls, a
phenomenon reminiscent of the bailouts seen in the West after
the global financial crisis of 2008.

The mechanisms for getting government cash into the banks
are already being limbered up.

In recent months company filings show at least half a dozen
listed banks including China Everbright Bank, China Minsheng
bank and Bank of Beijing have received approval for
raising capital, mainly through preference shares.

Analysts say the shares are likely to be taken up by
state-backed insurance firms and provincial governments.

Mid-tier lender Industrial Bank last month
raised $3.9 billion via a private placement of shares from
provincial governments and state-owned China Tobacco.

And at the weekend online financial magazine Caixin said
Bohai Steel Group, the indebted state-owned conglomerate whose
creditors include the Bank of Beijing, may receive help from a
local government bailout fund to restructure its debts.

“Banks are set to write off (bad debts) with … provisions,
or perhaps to try other market measures, such as securitization
or asset management companies,” said Qinwei Wang, an economist
at London-based asset manager Pioneer Investments.

“Should this not be enough, governments and the PBOC
(People’s Bank of China) are ultimately expected to step in,” he
said.

(Additional reporting by Shu Zhang in Beijing, Tripti Kalro in
Bangalore and Julie Zhu in Hong Kong; Editing by Will Waterman)

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