November 06, 2024 03:53 GMT
MNI: Beijing's Bank Capitalisations To Lift Tier-1, Lending
Advisors share their outlook for Beijing's bank recapitalisation plans.
Policy NewsPBOCCentral Bank NewsHomepageBellAPACExclusiveGlobalStoryEM Policy NewsEM ExclusiveChinaEM Central Bank NewsPeoples Bank of ChinaRegion
MNI (BEIJING)
Beijing will likely issue CNY1 trillion in special treasuries to help replenish capital of China's six largest state-owned banks, aiming to raise their core tier-1 capital by 1 percentage point on average, which will increase their propensity to lend,boost the economy and help manage financial risks over the coming years, advisors and economists told MNI.
Authorities will likely prioritise the Bank of Communications and the Postal Saving Bank next year following central bank approval, those familiar with banking regulation told MNI, noting the People’s Bank of China will also need to increase interbank liquidity via open market operations, bond trading or reserve requirement ratio cuts to cushion the market following the increased special treasury issuance.
The government’s significant fiscal stimulus meant it needed strong, capitalised banks to follow through with solid credit expansion, said Liu Xiaochun, deputy director of think-tank Shanghai Finance Institute. The lenders would also need to purchase at a considerable pace the additional bonds issued to help local governments resolve their debt risk, he added.
Large banks have likely suffered from increasing non-performing loans thanks to the economic slowdown, while mergers and acquisitions among small- and mid-sized banks have also pressured larger lenders’ capital, said Liu, also a former president of China Zheshang Bank.
The Ministry of Finance’s plan to replenish state-owned bank capital, revealed in October, not only represents the first time Beijing has injected large capital into its banking system since 2007, but also the first time since 1998 it has issued special treasuries to do so. The National People’s Congress Standing Committee meeting this week will discuss fiscal stimulus with details expected on Friday. (See MNI INTERVIEW2: China Fiscal Stimulus Seen Near 10% GDP)
China Construction Bank held the highest core tier-1 capital adequacy ratio at 14.1% against its 9% requirement, while Postal Savings Bank had the lowest at 9.42%, only 1.42 pp higher than its obligation, according to Q3 reports. CCB was labelled a global systemically important bank, increasing its total loss-absorbing capacity (TLAC) requirement to no less than 22% by 2028, leading its officials recently to highlight the urgency for capital injections.
CAPITAL GAP
Large banks are facing increasing pressure to raise capital, considering challenges in supplementing common equity tier-1 in the public markets and the fall of revenue from bank loans due to Loan Prime Rate reductions and sluggish credit demand, said Vivian Xue, director of Asia-Pacific Financial Institutions at Fitch Ratings.
Beijing needed to support large lenders’ credit expansion to ensure financial stability and their efforts to restructure loans within specific sectors, such as local government funding vehicles, which may increase risk-weighted assets, she argued. The agency estimated China's banks would grow credit by 9% in 2025.
Fitch downgraded the outlook of the six state-owned banks to negative from stable in April, following its cut to the outlook for China’s sovereign credit rating. The country's largest five banks will likely suffer a gap of about CNY1.6 trillion to meet their TLAC requirements by January 2025, with the amount increasing to CNY6 trillion by January 2028, Fitch noted.
The PBOC’s recent reduction of existing mortgage rates would further pressure large banks’ profits, Xue said , predicting their interest margins would continue to decline in 2025 alongside further LPR reductions.
SPACE APLENTY
Liu Ying, director of the Cooperative Research Department of the Chongyang Institute for Financial Studies at Renmin University of China, said the central bank could cut RRR 50bp later this year to inject liquidity into the interbank market, strengthening banks’ credit capacity – particularly to sectors targeted for economic restructuring – while paving the way for special treasury issuance. (See MNI INTERVIEW 2: China Fiscal Expansion Crucial, RRR Cut Eyed)
Authorities can also easily double the volume of longer-dated special treasuries, she argued, noting the transactions accounted for only 16.9% of total sovereign paper at the end of May compared to Japan’s 44.8%, the U.S.’s 22% and Germany’s 27.8%.
The PBOC lowered RRR 5 pp to 8% in 1998, releasing CNY270 billion in funds, allowing the four major banks to purchase special treasury bonds from the MOF, which then used the proceeds to inject capital into the four lenders.
689 words