Analysts Are Downgrading China's Small Banks at Record Pace
Analysts Are Downgrading China's Small Banks at Record Pace
(Bloomberg) -- Analysts are taking note of the struggles in China’s banking industry, which is being battered by an official deleveraging drive.
At least five smaller lenders have been downgraded by credit-rating companies this year, a record pace for the sector. Spikes in the volume of non-performing loans and an increase in loans overdue are among the reasons. One of the lenders -- Guizhou-based Guiyang Rural Commercial Bank Co. -- saw its bad debt balloon nearly tenfold in the space of two years, according to the assessor that slashed its rating.
China’s campaign to clean up its financial industry and crack down on a $10 trillion shadow-banking system is a double whammy for smaller lenders: it’s pushing up the costs for them to seek funding from each other, and makes their investments in opaque asset-management plans less secure. Recent regulatory moves to widen the definition of non-performing loans also added to the strain, forcing some banks to report more bad debt and a reduction in their capital-adequacy ratios.
“Small and medium banks are the weakest link in the deleveraging process, because of a lack of deposits and their dependence on market funding,” said Grace Wu, head of China bank ratings at Fitch Ratings Ltd. in Hong Kong. “Because the lenders do a lot of business with non-bank financial institutions, their own risks can become contagious and affect the whole system.”
Other lenders that have been downgraded include Jilin Jiaohe Rural Commercial Bank Co., whose 3 billion yuan ($443 million) of investments in wealth management products were troubled by a default earlier this year. Shandong Zouping Rural Commercial Bank Co. saw a rating cut from Golden Credit Rating International Co. after its non-performing loans ratio surged to 9.3 percent last year from about 2 percent in 2016.
Guiyang Rural Commercial’s asset quality is improving, and it will deal with its bad loans in accordance with regulatory requirements, an official at the bank who asked not to be named said by phone on Thursday. Zouping declined to comment, and several calls to Jiaohe’s press department weren’t answered.
Ratings companies have also cut their outlook for at least six smaller lenders to negative from stable since the start of 2017, citing reasons including deterioration of asset quality and weaker profitability, Industrial Economics Research & Consulting Co. analysts led by Xu Hanfei wrote in a recent research note.
Chinese policy makers made their latest move to crack down on shadow financing on Friday, with the government issuing draft rules to regulate banks’ issuance of wealth management products. Banking shares in Shanghai and Hong Kong rallied on Monday, led by Industrial & Commercial Bank of China Ltd., Hang Seng Bank Ltd., and BOC Hong Kong (Holdings) Ltd.
More Downgrades
Rural commercial banks’ non-performing loan ratio jumped to 3.3 percent at the end of March, compared with 2.6 percent two years ago, according to official data. The ratio for large commercial banks and joint-stock lenders in the first quarter stood at 1.5 percent and 1.7 percent, respectively, the data show.
| Date | Banks | Rating Move | Rationale |
| 9-Jul | Shandong Zouping | Cut to A+ from AA-; outlook negative | Credit risks in region that bank serves; rise in NPLs; slump in profits |
| 29-Jun | Guiyang Rural Commercial | Cut to A+ from AA-; outlook stable | Spike in NPLs; slide in profitability; liquidity and credit risks |
| 4-May | Shandong Guangrao | Cut to A+ from AA-; outlook negative | Rise in NPLs and overdue loans; significant weakening of asset quality |
| 23-Mar | Dandong Bank | Cut to A+ from AA- | Rise in credit risks; big-sized loans may hurt bank’s asset quality |
| 8-Feb | Jilin Jiaohe | Cut to A from A+; outlook negative | WMPs defaulted; major declines in net profits; slumps in capital adequacy ratio |
“A lot of problems will come to the surface because of the credit tightening, when a bank’s assets contract,” said Jason Bedford, executive director of Asian financials research at UBS Group AG in Hong Kong. “Under the new loan recognition rules it is likely a lot more banks will have to disclose material increases in non-performing loans. It seems likely that more banks will be downgraded.”
Bedford said he believes there will be more bank bailouts in an effort to manage the situation. That could be done through forced mergers or share capital injections by local state companies, he said.
Some of the government’s pressure on banks may be easing. A central bank official said Friday that debt is now stabilizing, a possible signal of a coming pullback in the anti-leverage campaign.
“The non-performing loan problem is simply too big to ignore now,” said Kevin Smith, chief executive officer at Denver-based Crescat Capital, whose global macro fund jumped 8.4 percent in June, partly due to its short-China bets. “China is only in the early innings of a large credit bust.”
To contact Bloomberg News staff for this story: Tian Chen in Hong Kong at tchen259@bloomberg.net;Jing Zhao in Beijing at jzhao231@bloomberg.net
To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Sam Mamudi, Will Davies
©2018 Bloomberg L.P.
With assistance from Editorial Board