Chinese Bank Skips Early Capital Bond Payment in Rare Move

(Bloomberg) -- A small Chinese lender made a rare decision to skip early redemption on its local tier-two bond, sparking fresh concern on the country’s smaller lenders as non-performing loans rise amid an economic slowdown.

Guangdong Nanyue Bank Co, based in the coastal province in Southeast China, said it won’t exercise an early redemption on its 1.5 billion yuan ($215 million) 6% tier-two bond next month, according to a filing on Thursday on the China Bond website. It didn’t give a reason for its move.

The 10-year note, sold in 2014, gives the issuer the right to redeem the bond in full at the end of the fifth year, according to its bond prospectus. Calls to the bank went unanswered.

“Given that most banks make early redemption on such securities, its (Nanyue Bank) not exercising the option will hurt investors’ confidence toward the bank,” said Zhiming Liao, an analyst at Tianfeng Securities Co. Liao said it would also make it uncertain whether the notes will be repaid on time at maturity, while increasing investor caution over such notes by other small lenders.

China’s banks, particularly the smaller ones, are facing a challenging outlook as efforts to boost growth and help struggling small businesses threaten to lower margins and increase soured debt. Chinese banks reported 2.2 trillion yuan of non-performing loans at the end of June, the highest in at least 15 years, according to the China Banking and Insurance Regulatory Commission.

Troubles facing Guangdong Nanyue’s biggest shareholders may also add to its woes. Neoglory Holding Group Co., which is going through a court-led bankruptcy restructuring after defaulting on its bonds, is the largest shareholder of Guangdong Nanyue with a 16.52% stake, followed by Gionee Communication Equipment Co., which is in liquidation, according to a report published by China Lianhe Credit Rating in June. The two hold a combined 25.4% stake in the lender, it said.

Small Bank Woes

Investors have kept a close watch over China’s smaller banks after the unexpected government takeover of Baoshang Bank Co. in May, which imposed losses on some creditors.

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

Chinese authorities are considering a sweeping package of measures to shore up smaller lenders, escalating efforts to contain one of the biggest risks facing the world’s largest banking system, people familiar with the matter had said.

As of the end of 2018, Nanyue Bank’s capital-adequacy ratio, a key measure of financial strength, was at 11.57%, above the 10.5% regulatory minimum for China’s non-systemically important banks, Lianhe said in the report in June.

--With assistance from Evelyn Yu and Xize Kang.

To contact Bloomberg News staff for this story: Ina Zhou in Hong Kong at hzhou179@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net;Zheng Li in Shanghai at zli698@bloomberg.net

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Chan Tien Hin

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With assistance from Bloomberg