The bond holdings of leading Chinese lenders continue to grow unabated in terms of both volume and percentage of total assets, prompting intensified scrutiny from banking regulators.
The latest round of annual reports from China’s banking sector indicates that the majority of 15 listed A-share lenders currently have bond holdings in excess of 10% of total assets, despite average earnings from fixed income securities falling 30bps.
At three of China’s big four banks bond holdings account for more than a fifth of total assets, including Agricultural Bank of China (23%), Industrial and Commercial Bank of China (22%) and Bank of Communications (also 22%).
Other major state-owned and commercial lenders that are also host to high bond holdings as a percentage of total assets include China Construction Bank (18%), Bank of China (17%), China Merchants Bank (14%), China Everbright Bank (12%) and Ping An Bank (12%).
Returns on Bond Holdings Have Weakened Since October
After hitting a peak in mid-August yields began to weaken in October as a result of capital scarcity, inflation expectations and deleveraging, leading to widespread losses for holders of RMB-denominated debt.
While the rate of return on many bond investments has fallen by around 30bps, some banks have seen the net interest revenue of their bond investments increase, as the scale effect of their holdings compensates for rates declines.
An outstanding example of this is Agricultural Bank of China, the Chinese banking sector’s biggest bond holder in terms of percentage of total assets.
ABC, whose average bond investment balance stood at 4.62 trillion yuan in 2016, while its average bond investment return saw a year-on-year decline of 35 basis points in 2016, sliding to 3.68%.
While rate changes reduced bond revenue by 13 billion yuan, increases in the scale of investment raised it by 35.1 billion yuan, for a net gain of 22.2 billion yuan.
Rising Bond Holdings Pique Interest of Regulators
The hefty bond holdings of major banks have triggered concern amongst regulators, particularly in relation to liquidity risk, credit risk and market exposure risk.
Regulators are particularly concerned by the fact that bonds are also a key asset class when it comes to off-balance sheet wealth management products. The scale of these wealth management products exceeded 29 trillion yuan by the end of 2016, and if bonds comprise 40% of such investment as estimated, then the scope of such debt holdings is more than 11 trillion yuan.
In the “Guidance Opinions on Banking Sector Risk Prevention and Control” issued on 10 April, China Banking Regulatory Commission emphasised the need to include bonds under unified credit control, as well as perform unified monitoring of all forms of bond investment, where it be direct investment or investment via special purpose vehicles or off-balance sheet products.