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Tuesday, August 23, 2016, 13:35

Policy push likely as China banks' capital shrinks

By Reuters

HONG KONG - 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 US$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 US$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.

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