Regions will shore up China's smaller banks

Bank of Jinzhou Co

02/08/2016 04:29

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are her own.) (Refiles to add context news.) 
    By Rachel Morarjee 
    BEIJING, Aug 2 (Reuters Breakingviews) - China's regions 
will back local banking champions. Anxious economists in Beijing 
may want to rein in risk-hungry local banks, but provincial 
officials have every reason to keep them afloat, as bad loans 
mount and capital buffers erode. 
    Industrial Bank  601166.SS , a mid-tier lender based in 
Fujian province, is the first of what is likely to be a queue of 
banks hitting up backers for capital. On July 29 it announced 
plans to raise $3.9 billion from six 
friendly shareholders, including its provincial Department of 
Finance and centrally owned China Tobacco. 
    Industrial needs more money because it - and peers - 
are getting squeezed. China's "Big Five" state-owned banks hog 
access to the borrowers with the best collateral and cleanest 
books. That leaves the also-rans squabbling for scraps, lending 
to riskier borrowers and indulging heavily in shadow banking. 
    There are two problems: first, the private sector is 
borrowing less. Second, officials want to discourage smaller 
banks from issuing high-yielding "wealth management products". 
That looks likely to suppress the one business line where banks 
like Industrial could compete with the big boys on relatively 
flat ground. 
    The fresh capital is welcome. Like other aggressive regional 
banks, Industrial is one of the weak links in China's financial 
system. It had a core Tier 1 capital ratio of just 9.2 percent 
at end-2015, according to its annual report. That is well below 
the industry average of 12.6 percent, Thomson Reuters data 
shows. 
    Moreover, as at peers such as Zheshang Bank  2016.HK  and 
Bank of Jinzhou  0416.HK , interbank deposits make up more than 
40 percent of Industrial's deposit base, according to Gavekal 
Dragonomics research. This reliance on other banks could leave 
medium-sized lenders vulnerable to a liquidity crunch if peers 
started to question asset quality. 
    In any case, though, Fujian needs banks it can order to prop 
up wobbly local employers. Thus, government-linked investors 
are riding to the rescue. The same goes for other embattled 
provinces struggling to downsize sunset industries without mass 
unemployment. Smaller banks may have ugly books, but if 
governments need them to keep throwing good money after bad, 
they will have to keep recapitalizing them. 
 
    On Twitter https://twitter.com/morarjee 
     
    CONTEXT NEWS 
    - Chinese commercial lender Industrial Bank plans to raise 
up to 26 billion yuan ($3.9 billion) in a private placement of 
shares to shore up its capital base. 
    - Industrial Bank, based in the southeastern province of 
Fujian, plans to issue up to 1.72 billion domestically listed 
A-shares at 15.10 yuan apiece, it said on July 29 in a filing to 
the Shanghai stock exchange. 
    - The bank's largest shareholder, the Fujian Provincial 
Department of Finance, has agreed to subscribe for 25 percent of 
the shares, while China Tobacco and two subsidiaries will take 
up to 42 percent. The rest will go to a local holding company 
and a state-owned asset investment company based in the 
province. 
    - "Competition among commercial banks in China is 
intensifying and it is becoming ever so important that banks 
ensure their capital base is strong," the lender said. 
    - The funds will be used to boost Industrial Bank's core 
Tier 1 capital, a measure of a bank's financial health.  
    - Reuters: China's Industrial Bank to raise up to $3.9 bln 
to boost capital  urn:newsml:reuters.com:*:nL4N1AF51J 
    - Shanghai Stock Exchange announcement: http://bit.ly/2aHD3AM 
     
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    - For previous columns by the author, Reuters customers can 
click on  MORARJEE/  
 
  
 
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 (Editing by Quentin Webb, Pete Sweeney and Katrina Hamlin) 
 ((rachel.morarjee@thomsonreuters.com;)(Reuters Messaging: 
rachel.morarjee.thomsonreuters.com@reuters.net)) 
 
Keywords: IND BANK EQUITY/BREAKINGVIEWS