Takeover of little-known Baoshang casts doubt over other small Chinese banks

Bank of Jinzhou Co

31/05/2019 24:00

(Repeats for morning readership. No change to text.)
    * China seized control of indebted Baoshang Bank last week
    * Baoshang's takeover fuels concerns over true health of
other
small lenders
    * Ratings of 11 small banks cut in 2018 vs two in 2017 -
Reuters
analysis

    By Ryan Woo and Cheng Leng
    BEIJING, May 30 (Reuters) - A rare government takeover of a
little-known Chinese bank has revived concerns about the true
health of hundreds of small lenders in the country as a slowing
economy and souring loans test their capital buffers and drain
their reserves.
    Regulators seized Baoshang Bank last week, citing serious
credit risks. The sudden takeover of the Inner Mongolia-based
lender has fanned worries about other banks with substantial
borrowings.  urn:newsml:reuters.com:*:nL4N2330MM urn:newsml:reuters.com:*:nB9N20N02G
    There are almost no public details about Baoshang's current
credit profile. Its "AA+" rating has not been adjusted since
2015 and the bank has not disclosed any financial data since
2017. According to Refinitiv data, Baoshang has 206 outstanding
bonds worth a total of 73.83 billion yuan ($10.69 billion).
    The circumstances around the Baoshang case, however, have
turned the spotlight on other banks that have similarly delayed
disclosures. Over a dozen small lenders, including Bank of
Jinzhou  0416.HK  and Bank of Jilin, have not published their
annual or quarterly reports this year, stirring concerns about
worsening asset quality and capital adequacy.
    The Bank of Jinzhou and Bank of Jilin did not respond to
Reuters requests for comment.
    "The life of some smaller banks is hard," said Felix Zhang,
founder and chief executive of Bairong Inc, a third-party risk
management firm backed by sovereign fund China Reform Holdings
Corp.
    He said three rural banks with bad-loan ratios between 20%
and 30% had approached him and wanted Bairong to buy them out.
    So far in 2019, the credit ratings of two rural banks -
Jilin Shuangyang Rural Commercial Bank and Anhui Tongcheng Rural
Commercial Bank - have been downgraded, for reasons ranging from
bad loans and inadequate bad-loan provisions to poor corporate
governance. 
    Last year, the ratings of 11 city and rural commercial banks
were cut, according to a Reuters analysis of reports issued by
domestic ratings agencies. That compares with just two
downgrades in 2017. 
    
    TOUGH TIMES
    China's city and rural commercial banks face higher risks as
they inherently lack the ability to diversify in terms of
geography, industry or clients, analysts say. 
    Their cozy ties to local governments also add pressure for 
them to support opaque local financing entities. 
    Jilin Shuangyang Rural Commercial Bank, in the northeastern
rustbelt, was downgraded to "A" in April from "A+", with ratings
agency China Chengxin International Credit Rating Co (CCXI)
citing weaker local economic conditions and the lender's risky
off-balance sheet business. 
    Stricter classification rules since last year on bad-loan
reporting are also expected to further increase the number of
bad loans at small banks that had previously put them under the
"special mention" category.
    The bad-loan ratio of Anhui Tongcheng Rural Commercial Bank
jumped to 12.25% at end-2018 from 3.03% a year earlier. The
lender was downgraded to "A" from "A+" by CCXI in January. The
ratings agency cited surging bad loans and a low loan-loss
provision ratio.
    The provision ratio of Anhui Tongcheng slumped to 25.2% in
2018 from 145.26% in 2017, according to CCXI. The lender's
capital adequacy ratio also dropped sharply to 2.28% at end-2018
from 14.06% a year earlier. 
    The market is closely watching any reassessment of the
credit conditions of smaller banks that haven't been downgraded
but could be on the verge of a credit crisis.
    China's credit ratings industry is dominated by six domestic
agencies whose reports do not necessarily disclose as many
details about their ratings decisions as those of their major
counterparts abroad. 
    One problem is a general reluctance among Chinese agencies
to give their "five-star" clients unfavourable ratings, for fear
of losing business, or being accused by the authorities of
causing market disturbances with "negative" news.
    Even when a bank is given a rating downgrade, the ratings
agency might not publicly offer a reason for the cut, citing
confidentiality clauses.
    Almost 700 city and rural commercial banks are rated at
least an "A", according to a Reuters analysis. 
    "The Baoshang takeover is a clear signal that regulators are
motivated to speed up the cleansing of poorly operated rural and
city commercial banks," said Dexter Hsu, a Taipei-based analyst
at Macquarie Research. 
    "There could be more consolidation of small banks. Looking
back on this, you'll find it's actually good for economic
health." 
($1 = 6.9087 Chinese yuan)

 (Reporting by Cheng Leng and Ryan Woo; Additional reporting by
Beijing newsroom; Editing by Sam Holmes)
 ((cheng.leng@thomsonreuters.com ; +8610-5669-2129))