(Refiles to update context news)
(The author is a Reuters Breakingviews columnist. The
opinions expressed are his own)
By John Foley
BEIJING, Sept 4 (Reuters Breakingviews) - China’s bad debts
could blow a $500 billion hole in bank balance sheets. That’s
roughly how much extra equity the eleven biggest lenders might
need if 10 percent of their loans went sour, according to a
Breakingviews calculator. Though the chairman of ICBC
(601398.SS), China’s biggest lender, thinks dismal bank
valuations are “unfair”, the malaise is well deserved.
Run the numbers: link.reuters.com/jaz72v
On the face of it, the industry is in great shape.
Non-performing loans were below one percent of total loans at
the end of June. But that number is meaningless. Many bad loans
are simply rolled over while overdue loans, a herald of problems
to come, are multiplying at some banks. Of particular concern is
the $1.5 trillion of credit channelled to local governments
through financing vehicles.
Assume the real bad loan ratio is a plausible ten percent,
and that banks have to clean up their own mess. That would leave
big lenders with $511 billion (3.2 trillion yuan) of bad debts
they haven’t already set aside provisions for. Though capital
ratios are currently above the minimum required by regulators,
banks would need almost $350 billion of new equity to recover
from the shock.
They also need capital to make new loans. If risk-weighted
assets expand by 20 percent, the total equity required is $491
billion. In this scenario, ICBC would need to raise the
equivalent of 53 percent of its current equity, Bank of China
(601988.SS) 73 percent. It could be more if regulators force
lenders to take off-balance sheet loans back onto the books.
Fortunately, fees from selling wealth products and credit
cards - not to mention cheap funding from capped deposit rates -
mean earnings are healthy. Even $500 billion is just twice the
eleven lenders’ combined pre-provision operating profit for
2012. They could also conserve capital by selling loans to
China’s asset management companies, as Bank of Communications
(601328.SS) did recently, or cutting back the $50 billion they
pay in annual dividends, most of which goes back to the
China may choose to defer the reckoning rather than face up
to its bad debt problem. But valuations are already languishing:
big banks trade at just 90 percent of their estimated book value
a year from now, according to Bernstein Research. The hit, when
it comes, will be large.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Chinese banks could need new equity of $491 billion in a
scenario where bad debts increase sharply, according to a
Breakingviews calculator featuring eleven listed lenders.
- China Merchants Bank (CMB) launched a 35 billion yuan
($5.7 billion) rights issue on Aug. 22. After the capital
raising, its core tier 1 capital ratio will rise from 8 percent
to 9.4 percent, according to a Breakingviews calculation.
- The China Banking Regulatory Commission has asked banks to
meet a ratio of 7.5 percent by 2018, and 8.5 percent for banks
deemed systemically important. Core tier 1 capital consists of
equity and retained earnings, making it the first part of the
balance sheet to absorb losses.
- The bank with the lowest core tier 1 equity ratio at the
end of June 2013 in the sample was Minsheng Bank, with a ratio
of 7.9 percent. The best capitalised were Chongqing Rural
Commercial Bank and China Construction Bank (CCB), with 10.9 and
10.7 percent ratios respectively.
- Other banks included in the analysis were Industrial and
Commercial Bank of China (ICBC), Bank of China (BOC),
Agricultural Bank of China (ABC), Bank of Communications
(BOCOM), China CITIC Bank, Industrial Bank (IND) and Shanghai
Pudong Development Bank (SPD).
- Bank of America sold its remaining stake of less than one
percent in China Construction Bank for $1.5 billion, exiting an
eight-year investment on Sept. 4.
- Reuters: Stock offering plans by Chinese banks seen as
short-term fix [ID:nL4N0GS084]
- Graphic: China's banks: how much equity do they need?: link.reuters.com/jaz72v
Japan trap [ID:nL4N0GT11Y]
Debt is in the details [ID:nL4N0GS1QX]
- For previous columns by the author, Reuters customers can
click on [FOLEY/]
(Editing by Peter Thal Larsen and Katrina Hamlin)
Keywords: BREAKINGVIEWS CHINA BANKS CALCULATOR
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