China Bank's Capital Almost Wiped Out as Loan Rules Tighten

(Bloomberg) -- A surge in bad loans has nearly wiped out the capital of a Chinese rural bank, according to a local ratings firm, raising fresh doubts about the financial health of the nation’s smaller lenders.

Guiyang Rural Commercial Bank Co., based in the southwestern Guizhou province, was downgraded by China Chengxin International Credit Rating Co. after its non-performing loans rose to 7.8 billion yuan ($1.2 billion) in 2017 from 841 million yuan two years ago. That caused the lender’s capital adequacy ratio to fall below 1 percent, compared with 11.8 percent at the end of 2016, Chengxin said in a statement dated June 29.

Guiyang Rural’s woes stem from recent moves by Chinese regulators to force lenders to classify as non-performing all loans that are overdue for more than 90 days, the ratings company said. Such overdue loans accounted for about 24 percent of Guiyang Rural’s total advances in 2017, resulting in a fourfold jump in the bank’s NPL ratio, to 20 percent of total loans, Chengxin said.

The China Banking and Insurance Regulatory Commission has been clamping down on various risks in the financial sector, including poor corporate governance, violation of lending policies, and cross-holding of financial products. The International Monetary Fund warned last year that Chinese banks need to increase their capital buffers to protect against any sudden economic downturn.

Smaller Banks

The move to reclassify all loans overdue for 90 days or more will lead to a 14 percent jump in Chinese banks’ non-performing loans, with most of the impact falling on city and rural commercial lenders, according to analysts at UBS Group AG. “We think the very purpose of these new rules is to bring the smaller banks in line,” UBS analyst Jason Bedford wrote in a note dated June 20.

“There are other banks out there in a very similar situation to Guiyang Rural Commercial Bank,” Bedford said by email Tuesday. Those most at risk of having their profit and capital eroded, should they top up bad-loan provisioning to 150 percent of NPLs, include Bank of Liuzhou Co., Shandong Guangrao Rural Commercial Bank Co. and Laishang Bank Co., he said.

Chinese lenders have been grappling with a growing mountain of bad debt after flooding the financial system with cheap credit for years to prop up economic growth. While their reported non-performing loan ratio stood at 1.75 percent as of March 31, according to official data, many analysts say that understates the problem. Lenders frequently flatter their reported figures by resorting to techniques such as rolling over credit for state-owned enterprises that lack the ability to repay.

Tighter Liquidity

At a time of tighter liquidity in the financial system, Guiyang Rural has stepped up sales of short-term bonds even as regulators are trying to curb financial leverage. It sold a record 2.6 billion yuan of negotiable certificates of deposit in the first half, compared with 480 million yuan a year earlier, data compiled by Bloomberg showed.

Guiyang Rural officials couldn’t be reached for comment as calls to the bank’s head office were unanswered.

The lender’s high proportion of overdue loans sparked market jitters in 2016. In that year, Chengxin International downgraded the bank’s rating outlook following a jump in its overdue loans to 30 percent of the total, compared with just 3 percent at the nation’s biggest lenders.

©2018 Bloomberg L.P.

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