It may be too soon to say that glimmers of hope can be seen in the quality of Chinese bank assets, considering they have off-balance-sheet assets that are collectively larger than the world’s fifteenth-largest economy.
The country’s six biggest commercial banks revealed this week that their off-balance-sheet assets — likely held through trusts and wealth management products — were worth 7.78 trillion yuan ($1.13 trillion) as of March — more than Mexico’s 2016 nominal gross domestic product of $1.06 trillion, or about a tenth of China’s economy.
Bringing these previously hidden assets to light immediately boosts their already substantial balance sheets by 7-9%, and smaller banks’ by 11-13%.
The six are Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications, and Postal Savings Bank of China.
Yet these “second” balance sheets also prompt questions on the significance of banks’ reported declines in nonperforming loan ratios as well as the sufficiency of their capital, since they were all under pressure to set aside more provisions for losses on impaired loans.
Chinese banks reported declining a nonperforming loan ratio over the first three quarters of 2016. But beneath the veneer of stabilizing asset quality looms a far greater hazard brought by fast-growing off-balance sheet lending and investment activities through channels such as so-called wealth management products (WMPs), according to ratings agency Fitch Ratings.
As a buffer against this risk, the agency estimates that mainland banks may need about 1.7 trillion yuan ($246 billion) in additional capital.
“In the past few years, we’ve seen WMPs carried off balance sheets continue to increase,” Jack Yuan, associate director at Fitch, said in a conference call on Thursday. He found that more than three-quarters of outstanding wealth management products, totaling 20 trillion yuan, resided outside banks’ loan books as of June.
Wealth management products were particularly prominent at midtier banks such as China Merchant Bank, China Everbright Bank, and Ping An Bank. Their wealth management products represented over 30% of their total assets, and more than half of their deposits.
State-owned commercial banks, with the exception of the Bank of Communications, are relatively less exposed. However, their issuance is considerable in absolute terms. Industrial and Commercial Bank of China(ICBC) is the single-largest issuer of wealth management products, with around 2.6 trillion yuan in outstanding issuance, according to Fitch.
Reuters with a piece on new government guidelines released Monday and the response from firms to restructure debt
Policymakers want to rein in corporate debt (Chinese companies sit on $18 trillion in debt, equivalent to about 169 percent of gross domestic product (GDP), according to the most recent figures from the Bank for International Settlements. )
China Construction Bank Corp (CCB), the nations’ second-largest lender by assets, has been reported in two deals to help big, debt-laden state companies in as many days, and other Big Four banks are expected to follow soon.
Foreign exchange sales in China accelerated last month, according to the country’s currencies regulator.
New figures released by the State Administration of Foreign Exchange show China’s commercial banks sold a net $31.7bn in foreign exchange in April, up from net sales in of $12.8bn in June.
That marked a month-on-month rise of 47.7 per cent and brought net forex sales for the year to date to US$205.5bn, a rise of 38.1 per cent compared to the same period in 2015. Large monthly swings are not uncommon.
Indian banks’ asset quality and capitalisation are likely to remain under pressure in the next 12 months mainly because of tepid industrial activity and high leverage by some corporates, Standard & Poor’s said.
“We expect profitability of Indian banks to decline over the next two to three quarters because banks recently cut base lending rates, and their credit costs are likely to remain high,” S&P credit analyst Amit Pandey said.
He said non-performing loans of banks with high exposure to troubled sectors will continue to rise, and credit costs of banks with a backlog of provisions will increase.These factors could strain the capitalisation of banks with below-average profitability, particularly as capital demands are likely to soar as Basel III norms get implemented.
“The asset quality and capitalisation of India’s banking sector is likely to remain under pressure in the next 12 months because of tepid domestic industrial activity, and subdued profitability and high leverage in some corporate sectors,” S&P said in its report- Indian Banks Face An Uphill Road This Year.
BAD LOANS For the year-ending March 2015, gross NPAs of scheduled commercial banks stood at Rs 3.02 lakh crore in absolute terms, or 4.6 per cent of total advances. Six months later, this rose to 5.1 per cent. The stressed advances ratio — stressed assets is defined as bad loans plus loans that have been restructured by banks — increased to 11.3 per cent in September 2015 from 11.1 per cent in March. Private estimates of stressed assets, however, are significantly higher and vary between 17.5 per cent and a quarter of all bank advances.
Moody’s Investors Service says that banks in China (Aa3 stable) will face a higher degree of uncertainty — and therefore risk — amid increased volatility in interest rates, exchange rates, stock prices and fund flows.
“We also anticipate further increases in loan delinquencies, more defaults on corporate debt and some losses in wealth-management products, as more borrowers struggle to meet payments against the backdrop of high financial leverage and a downturn in their respective sectors,” says Christine Kuo, a Moody’s Senior Vice President.
“While the Chinese authorities will implement measures to mitigate financial market volatility and corporate default, the effectiveness of such measures will vary, because of the challenges of managing China’s large and complicated market,” adds Kuo.
Moody’s analysis is contained in its just-released report titled “Banks — China: Frequently Asked Questions about Chinese Banks amid Recent Volatility,” and is authored by Kuo.
Moody’s report says that the financial performance of Chinese banks over the next two years will be driven primarily by the evolution of their asset quality, which is in turn a reflection of their risk appetites.
Will cut RRR by additional 50bps for qualifying institutions
Cuts effective 24th Oct
Says it is liberalising deposit rates for commercial banks and credit cooperatives
Will increase regulation of interest rates
Wants to improve the transmission mechanism of monetary policy
Removes deposit rate ceiling for banks
AUDUSD takes a leap to 0.7297 from around 0.7260
Most headlines are saying the RRR cut is 50bps but Reuters are saying the cut is 25bps with an additional 50bps cut for the qualifying institutions. It looks like it’s just a cut from 18% to 17.5% for most big banks
Update: Reuters have corrected their headlines for the RRR and confirm with everyone else that it has been cut by 50bps