Corrected: Chinese banks' shadow loans grow despite regulatory glower

Shengjing Bank Co

05/09/2016 05:14

(Corrects paragraph 14 to show shadow loans equal to a fifth of 
GDP, not five times) 
    * Shanghai Pudong has biggest shadow portfolio at $190 bln 
    * China Minsheng, China Zheshang portfolios rose 86 pct in 
H1 
    * Bank regulator trying to limit use of shadow lending 
products 
    * Shadow lending disguises scale and risk of loan portfolios 
 
    By Shu Zhang and Matthew Miller 
    BEIJING, Sept 5 (Reuters) - Shadow lending by listed Chinese 
banks surged in the first half, underlining the challenges faced 
by the country's banking regulator as it tries to rein in the 
use of opaque lending structures that are seen as a threat to 
financial stability. 
    China's lenders, led by the mid-tier banks, have been 
increasing their use of shadow lending products for years, as 
they can offer higher returns and tie up less of a bank's 
capital than traditional lending. 
    But they also disguise the quality of a bank's balance 
sheet, and sector-wide make it harder for regulators to assess 
systemic risk and the volume of lending in the economy. 
    A Reuters analysis of bank filings shows Shanghai Pudong 
Development Bank  600000.SS , a leading joint-stock lender, 
increased its receivables for trust schemes and asset management 
plans, or so-called shadow loans, by 14 percent in the first six 
months of the year to 1.27 trillion yuan ($190 billion), giving 
it China's biggest portfolio of such products. 
    The shadow loan book at China's largest joint-stock lender, 
Industrial Bank Co  601166.SS , rose 4.4 percent to 1.23 
trillion yuan, equivalent to 63 percent of its normal loan book, 
according to Reuters calculations. 
    China Minsheng Banking Corp  1988.HK , China Zheshang Bank 
Co  2016.HK , Shengjing Bank Co  2066.HK , Bank of Jinzhou Co 
 0416.HK  and Bank of Chongqing Co 1963.HK  also substantially 
increased their portfolios by 9 percent or more. 
    Minsheng and Zheshang both reported an 86 percent rise, the 
fastest among their listed peers, according to Reuters 
calculations. 
    "I'm actually a bit surprised that some smaller banks were 
still growing those positions," said Wei Hou, AB Bernstein 
banking analyst. Given the regulatory push, the trend ought to 
be going the other way, he added. 
    The China Banking Regulatory Commission (CBRC) didn't 
immediately respond to a request for comment. 
 
    NEW RULES 
    The CBRC has tried to address the rampant growth of these 
shadow lending products, particularly at mid-sized banks. 
    In April it issued Document 82 to lenders, which most 
bankers and analysts interpreted as an attempt to compel banks 
to increase provisioning on shadow loans and bring them in line 
with normal loans. urn:newsml:reuters.com:*:nL3N1801JO 
    Some analysts at the time said the move could force banks to 
seek fresh capital to shore up their balance sheets, a prospect 
that has become more likely as banks' capital positions 
deteriorated during the first half. urn:newsml:reuters.com:*:nL3N1B330Z 
    Shadow loans had already reached 12.6 trillion yuan at the 
end of last year, according to calculations by UBS, about a 
fifth of China's entire annual economic output. 
    And credit rating agency Fitch said in July that around a 
third of system credit resides outside bank loan books, 
undermining asset quality data. 
    That is particularly worrying since Chinese banks' 
non-performing loans are already at a record high, according to 
official figures, and most analysts think the real figures are 
several times worse. 
    The accounting treatment of these loan-like trust and asset 
management plans is significantly different.  
    "These shadow loans are not subjected to the same rules as 
the loan book, despite being largely credit in nature," said UBS 
Securities analyst Jason Bedford.  
    "As a result, normal limitations in the loan books, such as 
single-borrower exposure limits and non-performing loan 
recognition rules, don't apply." 
    Though the impact of the CBRC intervention is not evident in 
most of the listed banks' first-half filings, there are some 
positive signs. 
    China Merchants Bank Co  600036.SS  3968.HK  was one of the 
rare lenders to scale down its shadow loans in the first half, 
with a 23 percent decrease in receivables from trust schemes and 
asset management plans to 528.7 billion yuan, according to 
Reuters calculations. 
    The bank's deputy president, Li Hao, who acknowledged that 
"to some degree, the bank's non-standard investments are loans", 
indicated a change of approach was taking hold at the bank. 
    "For the future, the bank's practice will be more 
standardised when it comes to new investments," Li said. "They 
will no longer be put under the category of non-standard 
investments, but will be classified as loans," he told analysts 
on a post-results conference call. 
    Hou from AB Bernstein said he expected that mid-tier and 
smaller banks would scale down their investment receivable 
positions in the second-half of the year, else the regulator 
would come out with "more targeted policies". 
    But, he added, while stronger banks can cut their risks or 
increase provisions for their shadow loan holdings, it was more 
problematic for the weaker lenders. 
    "For banks facing big operational pressure, increasing 
provisions or bringing those high-risk investments back on their 
loan book would hit an already weak bottom line." 
 ($1 = 6.6779 Chinese yuan renminbi) 
 
 (Reporting By Shu Zhang and Matthew Miller; Editing by Will 
Waterman) 
 ((shu.zhang@tr.com; +86 10 6627 1271; Reuters Messaging: 
shu.zhang@tr.com)) 
 
Keywords: CHINA BANKS/SHADOW DEBT