China is expected to continue to extend support to problematic banks, but authorities will be selective in their approach after pumping in billions of yuan to bail out three banks in the last four months, say analysts.
Nicholas Zhu, a credit analyst at Moody’s Investors Service, said that while the Chinese government has been quick to deal with episodes of bank stress, as regulators aim to alleviate market fear of contagion risk amid ongoing shadow banking and interbank activity, they are also determined to push forward their policy goal of maintaining financial stability.
“The authorities will become increasingly selective in providing support, especially where banks do not pose significant systemic risk”, Zhu said in a report issued on Monday, adding that government support will eventually be more “tiered”.
In late May, authorities took over Baoshang Bank, followed by the rescue of Bank of Jinzhou by three state-owned financial institutions in July, and last month a sovereign wealth fund and Shandong government took part in HengFeng Bank’s debt restructuring.
China’s bank regulators take over Baoshang Bank, moving a step closer to breaking up financier Xiao Jianhua’s business empire
In general, as big banks bring higher volatility to the system and markets when in trouble and pose a greater risk of contagion, analysts typically incorporate a very high level of support to state-owned banks, a high level of support to large regional banks, and a moderate level of support to small regional banks.
Specifically, Chinese regulators are likely to avoid declaring non-viability for the four Chinese global systemically important banks, namely Bank of China, Industrial and Commercial Bank of China, Agriculture Bank of China, and China Construction Bank, the report said.
Analysts believe that while there is a low likelihood of either equity conversion or writedowns of these four banks’ future total loss absorbing capacity, for small banks some kind of “burden sharing by creditors” is possible.
A guideline issued by Chinese regulators in 2015 classifies lenders with total assets of less than 500 billion yuan (US$70.2 billion) as small banks.
Regulators have seen to it that investors absorb some of the losses when dealing with troubles at Baoshang Bank, Bank of Jinzhou and HengFeng Bank.
Wholesale creditors like Bank of Guizhou suffered impairment losses of up to 10 per cent of their net exposures to Baoshang Bank, the Moody’s report said.
Bank of Guizhou confirmed that it had made a provision of 174 million yuan against 1.75 billion yuan of placements at Baoshang Bank as of July 29, 2019.
“This non-zero loss sends the message that regulators want wholesale creditors to take responsibility for their evaluation of counterparty risk in the future … It contrasts to a full bailout of Baoshang Bank with public funds, which would have sent a message of regulatory forbearance on shadow banking and interbank activities,” the report said.
Analysts with Fitch Ratings shared a similar opinion in a report issued on Friday, noting that Chinese authorities will be providing “varying support for Chinese banks”.
The announcement by Bank of Jinzhou that it will skip payments to international investors on additional tier 1 (AT1) dollar bonds is a point in case.
“While [Bank of] Jinzhou’s case suggests that sovereign support is possible in China, even for banks with low systemic importance, we would not assume all AT1 securities would benefit from state support,” said the report led by Grace Wu.
The coupon skip could be part of gradual government moves to weaken investor assumptions of implicit state support and encourage greater differentiation of risk pricing between financial institutions, the report said.
More from South China Morning Post:
- How the Baoshang Bank takeover triggered a confidence crisis in small financial institutions and created a cash crunch in China
- Bank of Jinzhou gets Chinese state backing as ICBC and other financial institutions buy more than 17.3 per cent stake in it
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