Concerns Mount Over Capital Adequacy of China’s Listed Lenders


The slumping capital adequacy ratios of China’s listed banks are raising concerns amongst industry observers in the lead up to new CBRC requirements at the end of 2018.

Global consulting firm McKinsey has just released a new white paper which conducted stress tests on 20 of China’s listed banks, and concluded that 90% can expect to see their capital adequacy ratios decline based on prevailing trends for Chinese interest rates.

Industry observers point out that a number of factors are putting pressure on China’s banking sector at present, including a regulatory crackdown by CBRC as part of efforts to deleverage the economy, as well as narrowing interest spreads following rate liberalisation reforms.

The China Banking Regulatory Commission currently requires that until the end of 2018 all banks of systemic importance maintain capital adequacy ratios of 11.5%, while their tier 1 capital adequacy ratio and core tier 1 capital adequacy ratio must be at least 9.5% and 8.5%.

CBRC gives other banks a little more latitude, ratcheting down each of these requirements by a single percentage point.

The latest round of annual reports released by 18 of China’s A-share banks indicate that all of them satisfied regulatory requirements with respect to capital adequacy and core capital adequacy ratios last year.

The figures for some of China’s biggest lenders are showing a downwards trend and coming perilously close to regulatory thresholds.

At least five joint-stock commercial banks have seen their core tier-1 capital ratios fall to below 9%, with China Everbright’s falling to within 0.03 percentage points of to 8.21%.

The provision coverage ratio of China’s commercial banks is also falling following, with some lenders already far short of regulatory requirements.

This trend is particularly concerning for lenders given plans by CBRC to introduce a new set of requirements which must be satisfied by the end of 2018.

HuaChuang Securities expects that over half of commercial lenders could fall short of CBRC requirements, as the pace of credit extension impedes improvements to capital adequacy ratios.

Banks make haste to shore up capital quality

As pressure builds to improve capital adequacy ratios, commercial lenders are turning to a variety of means to improve the health of their assets including external financing and reductions in risk weighted assets.

With respect to external financing many commercial banks are resorting to additional stock issues – which is the preferred means for shoring up core 1 tier capital, as well as preferential shares, tier 2 debt and and convertible bonds.

Last year Shanghai Pudong Development Bank and Industrial Bank Co. already raised 14.8 billion yuan and 26 billion yuan respectively via additional stock issues.

In the past six months 11 listed banks have raised as much as 211.5 billion yuan via issues of preferred stock, with at least five other listed banks, including Bank of Communications and China CITIC expected to issue a further 105.9 billion this year.

Convertible bonds are also a popular means for raising core tier 1 capital, due lower issuance restrictions and financing costs, with analysts foreseeing a sharp increase in issues ahead.

At least five banks including China Minsheng and Jiangsu Jiangyin planning to raise a total of 98 billion yuan via convertible bond issues, while Bank of Ningbo has obtained the green light for a 10 billion yuan issue.

Another means adopted by banks to improve CAR, and one which many observers consider to be both more effective as well as sustainable, is reductions in higher risk assets.

Banks can resort to two primary means to reduce their higher risk assets – the first is the shift that many Chinese lenders are making towards a “light capital” operating model, and the second is asset securitisation.

A light capital operating model for the banks means focusing on those operations that employ less capital or whose risk provisions are more modest.

Securitisation of NPL assets can enable banks to reduce the growth of their credit assets in general while also reducing high risk assets.