China’s Biggest Banks Face $940 Billion Capital Shortage by 2024

(Bloomberg) -- China’s four largest lenders are facing a funding gap in the trillions of yuan to meet global capital requirements designed to protect the public and the financial system against massive bank failures, according to S&P Global Ratings.

Industrial and Commercial Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd., all considered globally-systematically important banks, last year had a total shortage of 2.25 trillion yuan ($323 billion) to comply with the total-loss absorbing capacity, S&P said in a report on Wednesday. The may grow to as much as 6.51 trillion yuan by 2024 as the pandemic erodes their earnings capacity, the ratings firm said.

“The Big Four banks’ synchronization with global loss-absorbing standards is a key topic for investors, because it influences capital structure, the cost of funding, and importantly, the mechanism for extraordinary support,” S&P analyst Michael Huang wrote in the report.

Combined earnings at China’s more than 1,000 commercial banks slumped the most in at least a decade in the second quarter as bad loans climbed to record. The big state-owned banks were among the hardest hit as they were called on by the government to salvage the economy and help struggling small businesses. The authorities have urged lenders to raise funds and strengthen capital buffers.

Global systemically important banks, or G-SIBs, in emerging markets must have liabilities and instruments available to “bail in” the equivalent to at least 16% of risk-weighted assets by Jan. 1, 2025, rising to 18% in 2028, according to the Financial Stability Board, created by the Group of 20 nations. Banks in developed markets met the first phase in 2019.

That time line could be accelerated under certain conditions. Chinese banks have been behind the rest of the world in terms of implementation.

©2020 Bloomberg L.P.

With assistance from Bloomberg