Huaxia Bank loans top cap despite business growth
The company puts out little information on fraud cases in its listing prospectus
Huaxia Bank's loans to its largest shareholder remain in excess of a regulatory cap, despite the dilution effect of rapid business growth in recent years, the lender revealed in its initial public offering prospectus yesterday.
Huaxia, which is to become the fifth listed bank on the mainland next month, also gives scant coverage to several financial fraud cases in the bulky listing document issued on the same day in which three former employees received prison sentences for deposit-related crimes.
Outstanding loans to the Capital Steel Group and its subsidiaries accounted for 14.01 per cent of the Beijing-based lender's net capital, according to the prospectus.
Mainland guidelines published last year require lenders to limit loans to any single shareholder and its connected companies to 10 per cent of a bank's net capital.
'There is the risk of over-concentration of lending,' Huaxia said in a warning at the start of its prospectus.
Capital Steel owns 20 per cent of Huaxia before it sells 28.57 per cent of its enlarged share capital on September 12 at 5.60 yuan per share - or 19.86 times last year's earnings - to raise 5.6 billion yuan (HK$5.25 billion).
In 2000, Huaxia's loan exposure to Capital Steel exceeded 40 per cent of its capital, Fitch analyst Arthur Lau said.
Capital Steel reported net profit of 308.5 million yuan last year, the prospectus said.
But with the state-owned steel giant undergoing difficult transformations in recent years, concern had been raised about non-performing loans at Huaxia, Mr Lau said.
Huaxia said that under the mainland's new, stricter classification standards, its bad-loan ratio was 4.79 per cent at the end of June.
But western analysts often put bad-loan ratios at mainland banks at far higher levels. For example, refinanced loans account for 7.8 per cent of Huaxia's portfolio, while loans that have been rolled over account for an additional 4 per cent.
Although Huaxia said these loans complied with mainland banking rules, banks were known for abusing refinancing and roll-overs to hide bad loans. The result was non-performing loans stayed that way and were often the hardest to recover, analysts said.
Over the past 21/2 years, Huaxia's loan book more than doubled to 124.31 billion yuan from 56.58 billion yuan, while its deposit base grew from 79.05 billion yuan to 168.8 billion yuan over the same period. Business expansion trimmed capital adequacy ratio by 0.36 percentage point in the first half to 8.01 per cent - against the international best practice of 8 per cent.
Huaxia devoted no more than a few pages of its nearly 300-page prospectus to irregularities. Commercial bills, discounting and loan problems involving more than 1.5 billion yuan at its Guangzhou, Jinan and Chongqing branches resulted in disciplinary action against more than 10 officials by the banking regulator in 2001.
