Chinese banks rush to increase debt as slowdown increases potential bad loans

Chinese banks are rushing to raise capital as they brace for a potential increase in bad loans due to the economic slowdown and the spreading housing crisis.

A record amount of new money came from financial markets, with banks selling 29% more bonds in the first half than a year ago to replenish capital and cover credit losses. Local authorities have also provided funds from the sale of government bonds to help cash-strapped regional lenders.

China’s economy grew at the weakest pace in more than two years in the second quarter due to Covid lockdowns and a prolonged slowdown in the housing market, fueling concerns about an increase in the number of businesses and individuals who cannot repay their loans. These fears were heightened recently when hundreds of thousands of homeowners said they would stop paying the mortgage on homes that are yet to be built, increasing pressure on developers who may find it more difficult to sell homes. projects and also having to repay bank loans.

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“We believe asset quality is deteriorating due to Covid-related lockdowns, the real estate crisis, risks associated with small and micro loans and the general economic slowdown in China,” said S&P senior director Harry Hu. Global Ratings. The government’s capital injections “will help these smaller regional banks that have large bad debt burdens to clean up their books and support local economies.”

In the year to July 27, lenders had sold 568 billion yuan ($84 billion) of additional Tier 1 debt, which is among the first to absorb losses in times of crisis, and Tier 2 bonds. China’s big four state-owned banks are the top sellers of bonds this year, according to onshore sales data compiled by Bloomberg, although local lenders including Bank of Hebei Co., Chengdu Rural Commercial Bank Co. and Bank of Shanghai Co. .. are also selling.

This debt is the main tool banks have to add additional capital, analysts including Liao Zhiming of China Merchants Securities Co. wrote in a report in May.

In addition to this, the central government will allow 320 billion yuan generated from the sale of special local bonds to be used to supplement the capital of small and medium-sized banks, Financial News reported last week, citing an unnamed official with China Banking and Insurance Regulatory Commission. The amount, including 120 billion yuan of lapsed funds from last year, is 60 percent higher than in 2020, when money from the sale of these bonds was first allowed to be used for this purpose. .

Doubtful debts increase

Bad debts rose by nearly 107 billion yuan in the first half to 2.950 billion yuan, according to the CBIRC. It’s the largest six-month increase since the peak of the national pandemic in the first half of 2020, according to Bloomberg calculations based on data from the commission. At the same time, banks’ capital adequacy ratio fell for the second consecutive quarter to 14.87% at the end of June.

“The pressure on non-performing loans to rebound increased as the downward pressure on the economy was gradually felt by the financial sector,” said Liu Zhongrui, an official with the statistics and monitoring department. risks of the CBIRC, during a press briefing last week.

The “slower than expected” economic recovery led S&P to raise its estimate of banks’ non-performing assets, which includes bad loans and some “special mention loans,” to 7.5% of total loans this year. That’s up from a May forecast of 6.5% and the actual ratio of 6% last year.

The problem is particularly acute for small and medium-sized lenders, who hold 29% of total banking sector assets, according to CBIRC data. They have long been plagued by lax governance, a heavy reliance on large local corporations for loans and deposits, and they are more exposed to weak links in the economy than large lenders, such as the agricultural industry and small businesses.

doubtful debts

Government efforts to push banks to lend more may exacerbate the asset quality problem. Demand for loans from businesses and households is weak as Covid restrictions remain a threat to business and household incomes, and if banks have to reduce their lending requirements to attract borrowers, they could find themselves making new loans with little hope of repayment.

Financial regulators have urged banks to increase loans to builders to help complete projects, and officials are considering giving some homeowners a grace period on payments, Bloomberg reported. This will likely worsen profits for banks that have already extended loan relief measures for small businesses and mortgage holders affected by Covid.

Regional risks

Authorities are accelerating the use of special local government bonds to bolster the capital of smaller banks this year “to shore up the important line of defense against bank risks,” CBIRC spokesman Qi Xiang said. , during last week’s briefing. In the first half of this year, 103 billion yuan of the special bond quota was allocated to Henan, Liaoning, Gansu and Dalian City, he said.

Liaoning had the highest number of “high-risk” financial institutions in a 2020 review of financial companies by the People’s Bank of China, followed by Gansu, Inner Mongolia and Henan. When it released the 2021 assessment in March this year, the central bank said high-risk companies were concentrated in four provinces, but did not name them. More than 90% of the 316 high-risk institutions belonged to rural and county banks.

There have been high-profile problems in banks in Henan and Liaoning recently, with protests in Henan from people who had their money stolen in the country’s biggest banking scam and a rural bank taken over by another bank in Shenyang, the capital of Liaoning. Both provinces were also affected by the mortgage boycott.

“Business sentiment and their ability to increase investment spending are both very weak, so economic momentum has yet to pick up,” said Peiqian Liu, chief China economist at NatWest Group Plc. “As long as the real estate and Covid problems persist, banks’ bad debts will continue to increase.”

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