After the deluge, Chinese banks eye quieter year

By Michael Wei and Simon Rabinovitch

BEIJING (BestGrowthStock) – China’s banks can be excused for wishing that the next few quarters bring them a boring stretch of business.

After all, the past year was topsy-turvy, from the highs of an unprecedented lending binge to the hangover that followed in the form of sorely frayed balance sheets.

The biggest banks are nearly through with a heavy dose of fund-raising to repair the damage and there is no longer a big shortage of capital in the sector, Chinese banking executives said during the past two weeks on the sidelines of the country’s annual session of parliament.

Chinese banks made a record 9.6 trillion yuan ($1.406 trillion) in new loans last year, fuelling concerns that they were sowing the seeds of a new crop of bad debts down the road.

One of last year’s most eager lenders, China Merchants Bank (3968.HK: ) (600036.SS: ), exemplified the sense of relief. After a $3.2 billion rights issue, the country’s sixth-largest bank is confident that it will be in good shape.

“This should be sufficient for the next three years,” Qin Xiao, Merchants Bank chairman, said in one of many interviews by bank executives on the sidelines of the parliament that officially wrapped up on Sunday.

Bank of China (601988.SS: )(3988.HK: ), one of the country’s ‘big four’ state lenders, said it wants to issue more shares in Hong Kong soon, an offering that could strengthen its balance sheet by some $7.7 billion.

“We want to do it as soon as possible but we will also have to find a good timing to make it happen,” Xiao Gang, Bank of China chairman said.

China’s main stock index (.SSEC: ) has been on a tight leash since August, oscillating around the 3,000 level, in part because of investors’ worries about banks’ capital raising.

But executives were confident that the bond and share issues were meeting with solid demand.

“Yes, it is a big number but I think it is okay for China’s big market to absorb it,” Xiao said, referring to Bank of China’s sale of 40 billion yuan of convertible bonds.

For the industry as a whole, clouds are beginning to clear as bank after bank successfully taps the market.

“Fundraising, as a key overhang in the banking sector in recent months, is subsiding,” said Sheng Nan, an analyst with UOB Kay Hian.


Market sentiment toward banks could turn more positive as investors see that those more cautious last year do not need to raise funds. For example, Industrial and Commercial Bank of China’s (1398.HK: )(601398.SS: ) outstanding loans rose by 16.2 percent last year, well below the nationwide average of 31.7 percent.

“We haven’t seen any pressure recently for fundraising,” ICBC President Yang Kaisheng said on the parliament’s sidelines. “From the perspective of credit management, the deposit-to-loan ratio stands at a relatively healthy level.”

Liu Mingkang, chairman of the China Banking Regulatory Commission, said the pace of bank lending has stabilised and that banks’ loan books are now safe and sound.

“I don’t think there is any problem, and the capital market is very cooperative,” he said.

The CBRC has earned international accolades for its work in helping transform the country’s lenders from debt-riddled basket cases a decade ago to some of the sturdiest performers during the global financial crisis.

But it is not about to rest on its laurels. Liu said China may introduce counter-cyclical capital charges — a model for which Spain is best known — if the economy begins to overheat.

The government used its annual parliament to affirm a full-year new lending target of 7.5 trillion yuan, down from last year’s 9.5 trillion yuan. There may be more or less in individual months, but that full-year goal is an effective ceiling, meaning that last year’s lending explosion will not be repeated.

Yvonne Zhang, an analyst with Moody’s, singled out earnings management, risk controls and efficient use of capital as areas in which Chinese banks can improve.

“Growth in the banking sector has relied heavily on balance sheet expansion, especially loan growth, to gain market share. It will now need increasing sophistication in banking operations,” Zhang said.


After the deluge, Chinese banks eye quieter year