MNI EXCLUSIVE: China Pushes Smaller Banks To Recapitalise

     BEIJING(MNI) - China will accelerate efforts to recapitalise small and

medium-sized banks to calm fears over risks in the sector and boost lending to a

softening economy, policy advisors and banking sources told MNI.

     Officials are encouraging SMBs to boost capital, via perpetual bonds or

preferred shares, or by stake sales to strategic investors or in IPOs, said Zeng

Gang, deputy director of the National Institution for Finance and Development, a

Chinese Academy of Social Sciences think tank. A lack of safe assets means SMBs

should find demand for perpetual bonds, Zeng said, adding that IPO approvals

have also been speeded up.

     SMBs' health has risen up policy makers' agenda this year following a

string of failures. In May, Baoshang Bank prompted the first publicly-funded

bank rescue in two decades, being taken over by the People's Bank of China. This

was followed by bailouts for Jinzhou Bank, via PBOC-backed certificates of

deposit, and Hengfeng Bank. This month Harbin Bank was rescued when state-owned

companies took big stakes. Fears over two other SMBs, Yichuan Bank in Henan

province and Coastal Bank in Liaoning, subsided when local authorities stepped

in.

     The PBOC has also injected liquidity into interbank markets to calm

investors' nerves.

     Wang Jun, chief economist at Zhongyuan Bank, the biggest city bank in

central China, told MNI boosting capital will enable lenders to cope with

potential risks, which are set to grow as the economy slows over the coming

years. It would also boost lending capacity, at a time when the authorities look

to banks to provide counter-cyclical stimulus.

     SMBs need about CNY1.15 trillion in additional capital to meet PBOC hopes

of increasing real economy lending, according to Guotai Junan Securities, which

predicts a 100bps reserve requirement ratio cut in 2020

     Regulators may ease bond issuance and IPO rules, and the central bank will

continue to ensure easy monetary conditions and ample liquidity, Wang said.

     --PERPETUAL PIPELINE

     On Sept. 16, the PBOC announced reserve requirement ratio cuts for targeted

city banks of 100bps, unlocking CNY100 billion. On Nov. 7, Huishang Bank and

Taizhou Bank reported approval for CNY10billion and CNY5 billion of perpetual

bonds respectively, the first such sales by regional banks. As of the end of

September, nine banks had sold CNY455 billion in perpetuals, and there were

issuance plans for another CNY470 billion, according to the PBOC.

     Eight lenders have received approval for IPOs this year, including seven

SMBs, and another 16 SMBs are reportedly awaiting green lights for share

offerings. Unlisted banks with over 200 stockholders have also been given

permission to issue preferred shares, the China Banking and Insurance Regulatory

Commission said on July 19.

     But while bigger SMBs will benefit from official support, most of the

roughly 4,000 lenders in the sector are small and might struggle to sell

securities, Wang said.

     The CEO of one southern Chinese SMB, asking for anonymity, reported fierce

competition from big lenders to provide credit to small companies.

     "They (big banks) can lend at below 4%, but we cannot as our borrowing cost

is higher, and we have to consider nonperforming loans and operating costs," he

said, adding that his bank usually lends to small business at about 8% and has

lost some of its best clients.

     Net interest margins have been squeezed by an official drive to lower real

lending rates, while deposit rates remain relatively high, he said. Strict risk

control regulations on interbank transactions also pressure profitability.

     "For us, these are not just difficulties, this is life or death," he said.

     His bank is seeking preferential support from PBOC targeted lending, and

working with state-owned banks to provide low-rate loans to small businesses.

     The banking sector may require consolidation, said Wang, adding that while

local authorities may be able to assist systemically important lenders if they

run into trouble, smaller lenders would need bigger institutions to step in.

     City-based SMB's NPL ratio rose to 2.48% as of the end of September, up

68bps from 2018, as rural SMBs saw bad loans rise to 4% from 3.95%, according to

Wind. But most SMBs are unlisted, said Wang, so their loans may not appear in

the data.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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