BANKING: Wobbly Banks Seek Public, Private Funds

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Bottom line: Beijing should wean big state-run banks off government hand-outs to force them to lend more responsibly, and should even consider allowing one or two failures to make its point.

3 banks seek public, private money

Three mid-sized Chinese banks were in the fund-raising headlines last week, reflecting the difficult times many now face as they struggle with growing volumes of bad debt due to China’s slowing economy. The trio, Postal Savings Bank of China, Everbright Bank (HKEx: 6818) and Huishang Bank, were aiming to raise a massive $10 billion collectively to bolster their balance sheets, each by taking in new investors.

But their target investors were quite different. Postal Savings Bank and Huishang both chose to court the private sector through share offerings to big institutional buyers. By comparison, Everbright chose to seek funds from its state-run parent.
Postal Bank and Huishang should be commended for seeking private sector funding sources, reflecting their attempt to behave like true commercial banks that can raise money by attracting true return-oriented investors. But Everbright’s plan reflects a continuing practice among some of China’s biggest banks, which sometimes make questionable loans with the belief they can get state bail-outs if they make bad business decisions.

Beijing should make a concerted effort to wean these state-dependent banks from government support by directing them to lend more commercially, and then forcing them to seek private money if they run into trouble. Such efforts could cause some short-term pain and may even lead to one or two failures. But such actions would send a clear signal to the entire banking community, and would ultimately lay the foundation for a more commercially-oriented and healthier financial sector.

China’s major banks are sitting on a big pile of bad debt that continues to swell as the economy slows. A big portion of that debt was issued in the years immediately after the global financial crisis, when banks were encouraged to lend money for big infrastructure projects without clear ways for borrowers to repay the money.

The nation’s commercial banks held a hefty 982 billion yuan ($153 billion) in non-performing loans at the end of March, up more than 50 percent from a year earlier, according to the latest government data. That means about 1.4 percent of those banks’ loans were considered unrecoverable, compared with just over 1 percent a year earlier.

Bolstering Balance Sheets

As the volume of bad loans swells, most of China’s largest banks have been engaged in major fund raising to bolster their balance sheets. Anhui-based Huishang Bank led the fund-raising headlines last week with reports that it would make a private placement worth up to $1 billion in Hong Kong. (English article； Chinese article) The bank had originally hoped to make an IPO, but turned to the private placement due to weak sentiment.

One day later, other reports emerged that China Postal Savings Bank was seeking to raise $6.5 billion by selling 15 percent of itself to private investors ahead of plans for an IPO. (English article; Chinese article) The list of buyers included some of the world’s top investment banks and other major domestic and foreign institutions, such as JPMorgan Chase and UBS, Singapore’s DBS and Temasek and local giants Tencent (HKEx: 700) and Ant Financial. The reports noted that big foreign investors were attracted partly by the bank’s relatively clean balance sheet, since it was traditionally a repository for individual savings rather than a major lender.

Finally came the reports that Everbright Bank was aiming to raise HK$19.6 billion ($2.5 billion) by selling shares to its state-run parent, Everbright Group. (English article; Chinese article) Under that plan, Everbright Bank would sell 4 billion of its Hong Kong-listed H-shares to its parent for a 43 percent premium to their last closing price. The bank almost certainly would never get such a premium from private sector sources, making the fund-raising look like the equivalent of a government-sponsored rescue package.

Everbright certainly isn’t the only major bank to depend on state support to provide it with badly needed new funds. Most of China’s biggest banks have also turned to similar sources, recently issuing billions of yuan in bonds and shares, much of which are believed to be purchased by government-connected organizations.

Banks like Everbright may feel they have a right to ask for such hand-outs, since they may feel Beijing offered its implicit support when they embarked on their massive lending binges to support the Chinese economy after the global recession of 2008. Beijing may now have no choice but to support these lenders to prevent a massive financial meltdown. But it should also limit that support and strongly encourage banks to seek private sources as an alternative, sending a clear signal that it wants the banks to take responsibility for their own balance sheets in the future.

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