Rescued China Lender Suspends Payments on Dollar Securities

(Bloomberg) -- A regional Chinese lender under the spotlight for liquidity strains plans to suspend dividend payments on its offshore preference shares, sending indicated prices on those securities tumbling.

Bank of Jinzhou Co., which was the subject of a government-orchestrated rescue in July, said Sunday that it’s seeking shareholder approval to halt dividends for the year through Oct. 26. That’s after its capital-adequacy ratios failed to meet regulatory requirements.

The bank’s dollar AT1s -- the riskiest type of bank bonds -- tumbled by some 20 cents on the dollar, according to traders contacted by Bloomberg. That suggests the news came as a surprise to some market players, even though officials had moved to shore up the lender in the wake of the seizure of one of its peers by regulators over a raft of troubles.

“It would be a shock to some investors who view Chinese bank AT1s as fixed-rate bonds, and is likely to affect the ability of smaller banks to issue them -- and the price they have to pay,” said David Marshall, co-head of Asian bank research at CreditSights Inc.

Bank of Jinzhou is one of several smaller banks in China that have come under extreme pressure as the economy has slowed and loans have turned sour. Authorities have tried to restore the health of these struggling regional lenders -- a key source of credit to small and medium-sized companies -- while avoiding the moral-hazard dangers of a government backstop that safeguards investors against losses.

• On Friday, Bank of Jinzhou made its first earnings announcement in a year, reporting its first-ever loss -- of 4.6 billion yuan ($642 million) for 2018.
• Bank of Jinzhou’s capital-adequacy ratio, a key measure of financial strength, slumped to 7.47% as of June 30, from 9.12% as of Dec. 31 and 11.67% in 2017. The figure is now well below the 10.5% regulatory minimum for China’s non-systemically important banks.
• Bank of Jinzhou’s non-performing loan ratio surged to 6.88% in June, from 1.04% at the end of 2017.

With the bank’s core Tier 1 capital adequacy ratio at 5.14% at the end of June, it’s “barely above” the so-called loss-absorption trigger of 5.125%, according to Nicholas Yap, credit-desk analyst at Nomura International (HK) Ltd. “Any further deterioration could result in the offshore AT1s being mandatorily converted into H-shares,” he said, referring to the bank’s Hong Kong-listed stock -- which has been suspended since April.

Investors have been jittery ever since the shock government takeover of Baoshang Bank Co. in May, which imposed losses on some creditors. That move had sent borrowing costs for lower-rated banks soaring, before moves by regulators to ensure liquidity helped that premium come back down.

Among the steps officials took to ring-fence the situation was a rescue for Bank of Jinzhou in July that saw Industrial & Commercial Bank of China Ltd. and two other state-owned firms agreed to buy at least 17% of the lender.

The news on Bank of Jinzhou reverberated through the AT1 securities of other smaller banks on Monday, with Bank of Zhengzhou and Bank of Qingdao’s both indicated at 4.5 cents lower, according to credit traders. A Huishang Bank security fell by 1.3 cents on the dollar, the most in about three months according to data compiled by Bloomberg.

“As far as we know, none of the other small banks with dollar AT1s are at risk of coupon cancellation at present, as none have made sizeable losses and all are still reporting capital ratios above regulatory requirements,” Yap said. Even so, “current valuations do not adequately compensate investors for the risks,” he said, expecting premiums on small banks’ AT1s over those from large banks to rise.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net;Ina Zhou in Hong Kong at hzhou179@bloomberg.net

To contact the editors responsible for this story: Candice Zachariahs at czachariahs2@bloomberg.net, Christopher Anstey

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With assistance from Bloomberg