Insight: China probes small bank shareholdings as risk worries persist (updated)

Bank of Jinzhou Co

31/07/2019 02:16

* Regulator directs small banks to check shareholding
structure
    * Focus also on main shareholders' borrowings from small
banks
    * Latest crackdown comes amid growing signs of banking
stress     

 (Adds China Vanke comment)
    By Cheng Leng and Sumeet Chatterjee
    BEIJING/HONG KONG, July 31 (Reuters) - China is sharpening
its scrutiny of small banks' shareholders amid fears that loans
from the lenders to big investors could prove a weak point in
the country's financial system, jolted by the state's weekend
rescue of one lender and recent takeover of another.
    While nominally small, China's numerous small city
commercial banks risk having outsized significance because of
their close ties to the rest of the banking system as well as
with bigger shareholders, many of whom are giant companies.
    Earlier this month, the China Banking and Insurance
Regulatory Commission (CBIRC) asked banks and some other
financial firms for details of any investor building up stakes
of 5% or more without required regulatory approvals.
    The regulator also asked the firms if they had disclosed all
business transactions with their main owners, according to a
regulatory notice seen by Reuters.
    Regulators have also conducted spot checks at some smaller
banks in the last two months to probe possible misuse of capital
linked to shareholders and transferring of ownership interests,
said four people with direct knowledge of the matter.
    The scrutiny comes amid concerns that some debt-heavy
Chinese private enterprises have amassed substantial stakes in
smaller banks without regulatory approval and are using the
lenders for their personal borrowings.            
    "There may be many shareholders using small Chinese banks as
ATM machines, but I don't think we have enough understanding of
bank ownership to know," said Andrew Collier, managing director
of Hong Kong-based Orient Capital Research.
    "Certainly if there are under-capitalized corporates as
majority shareholders of the less well-funded smaller banks you
could have a bank run," he said, adding the regulators have so
far done a good job of rescuing ailing financial firms.
    Regulators have also asked banks to detail transactions with
any related parties, which are entities controlled or jointly
controlled by their major shareholders, between January 2018 and
June 2019.
    Another risk is that some big shareholders have pledged
their shares as collateral for loans or other purposes such as
acquisition capital or are investing in opaque wealth management
products, said another lawyer who works with the CBIRC.
    The pledging of shares can leave the bank at risk of a
sudden shift in its ownership - potentially even a change of
control - if the shareholder forfeits the shares in struggling
to repay the loans.
    The CBIRC didn't respond to Reuters' request for comment on
its latest crackdown. The people spoke to Reuters on condition
of anonymity due to the sensitivity of the matter.
    
    RELATED ENTITIES
    Regulators' focus on small banks and their connections has
intensified since late May, when the surprise takeover of
Baoshang Bank  BAOTO.UL  sent shockwaves through China's
interbank markets, sharply raising borrowing costs - not all of
which have returned to their pre-takeover levels. 
    In their seizure of Baoshang, regulators cited improper and
illegal use of significant bank funds by Tomorrow Holdings,
which held 89% of the Inner Mongolia-based bank's shares.
 urn:newsml:reuters.com:*:nL4N23G02H
    "The rationale behind the checks arises from recent
corporate activities. And such activities do not only exist in
Baoshang Bank," said a Beijing-based lawyer, referring to
shareholders' borrowing from banks.
    A second bank was rescued last weekend with three
state-controlled financial firms agreeing to inject funds into
Bank of Jinzhou  0416.HK . The total amount to be invested was
not announced, but they will take at least 17.3% in the troubled
lender.  urn:newsml:reuters.com:*:nL4N24T06B
    Shares in Bank of Jinzhou have not traded since April, when
its auditor, EY, quit after refusing to sign off on its 2018
accounts because it could not agree with the bank on how to
verify the actual use of loans made by the bank, some of which
it feared did not match the purpose given. 
    The bank counts debt-laden Yinchuan Baota Refined Chemical
Industry Co, a privately-run refining and petrochemical group, 
as one of its top three shareholders, according to its 2018
interim report. The chairman of Yinchuan's parent was arrested
in December 2018 for alleged fraud.  urn:newsml:reuters.com:*:nH9N1YN028 
    Another example of the ties that build up between banks and
their shareholders came last month with a fine of 200,000 yuan 
($29,027.58) imposed on Bank of Liuzhou by the CBIRC for
breaking limits on loans to a single group. 
    While rules limit banks to lending 15% of their net capital
to a single entity, Bank of Liuzhou extended a 3.64-billion yuan
credit line to its main shareholder, Liuzhou City Construction
Investment Development Co, by end-2018, equivalent to 23.79% of
the bank's net capital. 
     
    CORPORATE WHO'S WHO
    Large banks in China, as elsewhere, have shareholder
registers that tend to read like as a fund manager who's who.
Not so for the smaller banks, whose registers often read more
like a who's who of the corporate world and provincial
government entities. 
    Chinese liquor giant Kweichow Moutai  600519.SS  is the No.2
shareholder in Bank of Guizhou, which last month filed for a
Hong Kong stock listing to raise up to $1 billion, with a 14.13%
stake in the city commercial bank.
    Moutai chairman Li Baofang said in May last year the group's
financial arm had become "more and more important for the
development of Moutai".
    Chinese banks, like most of their global peers, don't report
client-specific business details, but a review of Bank of
Guizhou's IPO prospectus showed overall credit exposure to
related parties as a percentage of its loan book soared to 44.3%
at the end of March 31, 2019, up from just 6.8% in 2017 and
bringing it close to the regulatory limit of 50%.  
    Several heavily-indebted Chinese conglomerates are also big
bank shareholders. 
    China Evergrande  3333.HK , which has one of the highest
debt ratios in the Chinese property sector, last month agreed to
inject $1.9 billion into Hong Kong-listed Shengjing Bank
 2066.HK , raising its stake to 25% from 17.3%, as the bank
faced "a real need to raise its level of capital adequacy".
    Shengjing Bank's loans to related parties jumped nearly six
times at the end of last year, from 2017, even as its core
capital adequacy ratio, which measures a bank's financial
strength, dropped half a  percentage point to 8.52% in the same
period, its annual report showed.
    Among other major bank stake owners, developer China Vanke
 000002.SZ  is the largest shareholder with nearly 28% of the
underlying shares in Huishang Bank  3698.HK , while a unit of
the struggling HNA Group conglomerate owns 14.6% in unlisted
Yingkou Coastal Bank.
    China Vanke declined to comment. The other companies and
banks did not respond to a request for comment from Reuters.
    "The shareholding structure of some high-risk smaller banks
might seem to be okay from the outside, but actually they're
being hollowed out by transactions related to the shareholders,"
said a vice president of a city commercial bank.
    "It's time to see through them with tighter regulations."
    ($1 = 6.8900 Chinese yuan renminbi)

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China's banking sector bad loans     https://tmsnrt.rs/2WhWNwL
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 (Reporting by Sumeet Chatterjee in Hong Kong and Cheng Leng in
Beijing; Additional reporting by Li Zheng; Editing by Jennifer
Hughes and Philip McClellan)
 ((sumeet.chatterjee@thomsonreuters.com; +852-2847 2094; Reuters
Messaging: sumeet.chatterjee.thomsonreuters.com@reuters.net))