BEIJING (Reuters) – Chinese banks are likely to face headwinds as they raise funds next year as profit-conscious investors cling to margins, hoping that a wave of delinquent loans will hurt the sector and erode already existing margins. decreasing.
The sector is ending its worst annual performance in years after dropping record provisions due to COVID-19, while Beijing urged banks to sacrifice profits to help the economy.
Next year, as creditors end tolerance for pandemic-related loans – which allows borrowers to suspend payments or pay less interest – banks must bolster their capital against loans previously not classified as non-performing.
Large and medium-sized creditors also need to improve their capital adequacy, as required by global and domestic security guards.
China’s banks raised 1.2 trillion yuan ($ 18 billion) in the first 11 months of the year, out of the pace of 1.5 trillion yuan in 2019, data from Fitch Ratings show.
The 26 listed banks may need to replenish at least 1.25 trillion yuan of capital in 2021, estimates the Shenzhen-based brokerage Guosheng Securities.
“The pressure to raise capital for the entire banking sector is still very high,” said Vivian Xue, director of financial institutions at Fitch in Asia Pacific. “China’s largest banks will need to raise substantial capital or debt to absorb losses in the years to come.”
The top four – Industrial and Commercial Bank of China, Construction Bank of China, Agricultural Bank of China and Bank of China – face a deficit in this 4.7 trillion yuan loss-absorbing debt by the end of 2024 to meet the requirements established by the Basel Accord. Financial Stability Board, according to Fitch.
In this scenario, Fitch assumes that risk-weighted assets, including loans, will grow 8% per year.
The Group of 20 major economies adopted “total loss-absorbing capacity” in 2015 as a standard to help ensure that the world’s largest financial institutions have the resources for any restructuring, while minimizing support from public funds.
MINOR BANKS
But the more than 4,000 smaller, unlisted banks in China have more acute financing needs, analysts say, despite 200 billion yuan in special government bonds this year to help recapitalize regional banks.
“Smaller banks will have a bigger gap,” said analyst Wang Jian at Guosen Securities.
Fundraising tools include tier two bonds, perpetual bonds for larger banks, public stock offers, strategic capital injections and government-led investments for smaller creditors.
Despite the range of options, banks face challenges to win the interest of investors.
“Small banks will have trouble getting recognition from investors,” said analyst Wang Yifeng of Everbright Securities.
Investors have been indifferent to bank IPOs due to poor stock performance, said Dai Zhifeng, an analyst at Zhongtai Securities.
Mainland banks’ shares have fallen 6.5% this year, although China’s broader market has risen 22%.
Concern about credit risks in smaller creditors, following the seizure of Banco Baoshang, also dampened confidence in capital instruments issued by regional banks, Dai said.
At the end of retail fundraising, mainly through deposit products, major creditors will be favored over regional ones.
Urban and rural commercial banks will find it more difficult to attract deposits due to the weak customer base and regulatory restrictions on high-yield deposits.
($ 1 = 6.5302 yuan Chinese renminbi)
Reporting by Cheng Leng, Zhang Yan and Ryan Woo; William Mallard edition