BEIJING (Reuters) – Chinese banks are expected to face fundraising winds next year as profit-conscious investors cling to the brink, waiting for a wave of non-performing loans to hit the sector and erode already weakened margins .
The sector is ending its worst annual performance in recent years after setting aside record provisions for COVID-19, while Beijing has urged banks to sacrifice profits to help the economy.
Next year, as lenders cease resistance to pandemic-related lending – allowing lenders to suspend repayments or pay less in interest – banks need to consolidate their capital against loans that were not previously classified as underperforming.
Large and medium-sized lenders also need to improve their capital adequacy, as required by global and domestic watchdogs.
China’s banks raised 1.2 trillion yuan ($ 18 billion) in the first 11 months of the year, off the rate of 1.5 trillion yuan for the whole of 2019, according to Fitch Ratings.
The 26 listed banks may need to fund at least 1.25 trillion yuan in capital in 2021, estimates Guosheng Securities, a Shenzhen-based brokerage.
“The pressure of raising capital for the entire banking industry is still quite high,” said Vivian Xue, director of financial institutions Asia-Pacific Fitch. “China’s largest banks will have to raise substantial capital or debt-absorbing debt over the next few years.”
The top four – the Industrial and Commercial Bank of China, the Construction Bank of China, the Agricultural Bank of China and the Bank of China – face a shortfall in this loss-absorbing debt of 4.7 trillion yuan by the end of 2024 for meet the requirements set by Basel. Financial Stability Committee, according to Fitch.
In the scenario, Fitch assumes that risk-weighted assets, including loans, will increase by 8% annually.
The Group of 20 major economies adopted “total loss-absorbing capacity” in 2015 as a standard to ensure that the world’s largest financial institutions have the resources for any restructuring, while reducing support from public funds.
SMALLER BENCHES
But China’s more than 4,000 smaller, unlisted banks have more acute financing needs, analysts say, despite 200 billion yuan of local government special bonds this year aimed at recapitalizing regional banks.
“Smaller banks will have a bigger gap,” analyst Wang Jian told Guosen Securities.
Fundraising instruments include tier two bonds, perpetual bonds for larger banks, public offering, strategic capital injections and government investment for smaller creditors.
Despite the range of options, banks face challenges in winning the interest of investors.
“Small banks will have trouble gaining investor recognition,” analyst Wang Yifeng told Everbright Securities.
Investors have been heated on IPO exchanges because of their poor stock performance, said Dai Zhifeng, an analyst at Zhongtai Securities.
Mainland banking shares fell 6.5% this year, even as China’s wider market rose 22%.
Concern about credit risks to smaller creditors following the confiscation of Baoshang Bank has also cooled confidence in equity instruments issued by regional banks, Dai said.
At the end of the fundraising retail, mainly through deposit products, large creditors will be favored over regional ones.
Urban and rural commercial banks will find it more difficult to attract deposits due to a weak customer base and regulatory repression of high-yield deposits.
(1 $ = 6.5302 Chinese Yuan renminbi)
Reporting by Cheng Leng, Zhang Yan and Ryan Woo; Mountainous of William Mallard