​MNI EXCLUSIVE: China To Widen SPB Use To Recapitalise Banks​

China will allow more provinces to use special-purpose bonds to recapitalise regional banks, policy advisors said, a move that could soak up the surplus in such debt, boost lending to small and medium companies and make the banks more attractive for investors.

Advisors estimate that at least 10% of the 4,000-odd city and rural commercial banks need funds to shore up capital as profit margins thin and bad debt balloons. The China Banking and Insurance Regulatory Commission (CBIRC) is encouraging mergers so that lenders can achieve scale and attract investors but in the meantime, government support is critical for the banks' survival, advisors said.

Beijing is also hoping that recapitalisation will curb the reckless expansion that has driven many banks beyond regional borders and increased leverage. It wants such lenders to focus on helping local clients, especially the small businesses that are vital to sustain the recovery.

Recapitalising small and medium size banks has become an "important option" to fully use bond quotas approved in March, said Dong Ximiao, the chief analyst at Merchants Union Consumer Finance. China approved CNY3.65 trillion in special purpose bonds for local governments this year but the number of viable infrastructure projects that are the primary target of these bonds is dwindling, suggesting some will be used for other policy initiatives.

PROCEDURAL DELAYS

Last year, 18 provinces received CNY200 billion in such bonds to recapitalise banks. Just over a quarter of the amount has been used by six provinces, public data show. Two advisors said the overall quota may increase this year while Dong expects more provinces to be included in the program. Xiao Yuanqi, a vice chairman of CBIRC, told MNI earlier that the slow issuance is mainly due to procedural factors as the local government needs to coordinate with various bodies on using the bonds.

Regional banks accounted for 40% of the CNY2.7 trillion in outstanding bad loans as of last year end. Rural commercial banks, which operate mainly in villages or counties, had the highest bad-loan ratio at 3.88%, 204 bps above the industry level. Meanwhile, the capital adequacy ratio for rural banks stood at 12.37% in last Q4, down 44 bps from last Q1, according to data published by the CBIRC.

BANK PERFORMANCE

Currently, local governments have two options to invest in regional banks. One is in the form of deposits, which can be converted to equity under some conditions. The other is through cash handouts to local financial vehicles to invest in the banks. By using special purpose bonds instead, local governments can take advantage of lower interest rates and extend the term of the debt, said advisors.

Local governments will have to pay particular attentionto the banks' performance in deciding whether to exit the bonds when they mature or renew them, said a person with a ratings agency who wished to remain anonymous.That, in turn, could pressure the banks to improve their profitability and corporate governance.

Vice-Chairman Xiao said last week that the regulator welcomed institutions with special expertise, such as in wealth management and risk pricing, to take a stake in local financial institutions or even become controlling shareholders.

Singapore's DBS Group recently said it would take a 13% stake in Shenzhen Rural Commercial Bank for CNY5.29 billion, the first ever foreign investment in a decade in a small Chinese lender.