MNI SOURCES: Small Chinese Bank Recapitalisation Must Speed Up

     BEIJING(MNI) - Chinese regulators should accelerate the recapitalisation of

small- and medium-sized banks, which have been hit by a crisis of confidence

after the government made clear it would not completely bail out investors if

lenders run into trouble, MNI understands from a policy advisor and market

sources.

     Four smaller financial institutions have had to be rescued since May, when

the People's Bank of China shook bank debt markets by taking over

Inner-Mongolia-based Baoshang Bank, and announcing that only 90% of the

principal on the large obligations including negotiable certificates of deposit

would be repaid. While the PBOC said that it would ensure payment of all

personal accounts and interbank debts of less than CNY50 million, the partial

removal of what investors had until then believed to be an implicit government

guarantee on all bank debt pushed up financing costs for other smaller lenders.

     Three state banks took 17.3% of shares in Bank of Jinzhou in Liaoning in

July, with Industrial and Commercial Bank of China, the country's largest by

assets, investing up to CNY3 billion. This month, Hengfeng Bank in Shandong was

saved by what was reported to be CNY30 billion provided by the local government.

And it has not only been the authorities moving to save lenders. Shengjing Bank,

also in Liaoning, was bailed out in June by its biggest shareholder, Evergrande,

which injected CNY13.2 billion in response to "a real need to raise its level of

capital adequacy".

     "The small-and-medium banks are having a tough time with the increased

perception of their credit risk and with the economic slowdown," a policy

advisor specialising in the banking sector, who asked for anonymity, told MNI.

"The authorities are helping by providing ample liquidity, both overall and in a

targeted way, and by supporting them to increase capital and finding them new

shareholders."

     "The priority now is preventing isolated cases from spreading and

triggering systemic risks," said the advisor, adding that while more bailouts

may be necessary, authorities would prefer for them to be conducted "in a more

market-oriented way," with struggling banks obliged to attract new investors

rather than receiving state-orchestrated rescues.

     --INVESTOR CAUTION

     Investors' appetite for future issuance of preferred or ordinary stock

issuance, however, is not guaranteed in the current climate. Most of the small

banks' shareholders are private companies, which may be facing their own

challenges as the economy slows, the advisor noted, conceding that state-owned

companies and financial institutions would continue to play a major role in

cleaning up troubled smaller lenders, likely leading to more concentrated

ownership of the financial sector.

     More than 10 small banks have been downgraded since the beginning of 2019

due to rising bad loans and liquidity pressures, according to Wind, a Chinese

financial data provider. About 20 have delayed the release of their 2018 annual

reports.

     In its latest Monetary Policy Report, the PBOC attributed some of the

smaller banks' travails to insufficient capital, and said it would push them to

raise more.

     The authorities have adjusted regulations to allow unlisted banks to more

easily issue preferred stock for recapitalisation, the advisor said, adding that

the PBOC had also encouraged the issuance of perpetual bonds, by allowing them

to be swapped for highly-liquid central bank bills.

     Meanwhile, precariously-capitalised smaller lenders are becoming more

cautious about lending, a loan manager of a small east coast bank told MNI,

noting that this could hurt small businesses at a time when they are already

having to cope with an economic slowdown and the trade dispute with the U.S.

     Smaller- and medium-sized lenders' nonperforming loan ratios are running at

two to three times reported levels, the manager said. According to the China

Banking and Insurance Regulatory Commission, commercial banks' average NPL ratio

was 1.81% in the first half of the year.

     "It would choke small companies if the small- and medium-sized banks cut

loan provision, then the NPLs would surge and bring bigger risks. So we have to

continue our support, and hope the situation improves soon," he said.

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

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