Minsheng Banking's actions highlight why Beijing had to intervene
The bank's actions highlight the reasons Beijing was forced to intervene
The funding crunch prompted by the mainland central bank was meant to teach a lesson to banks that continue to embrace risky lending tactics.
A look at the funding and loan figures at mid-sized lender China Minsheng Banking helps explain why the People's Bank of China made its move.
The PBOC's refusal to inject cash into the money market system last week caused a spike in interbank lending rates. Suddenly, banks used to borrowing at 3 per cent saw the rate at which their peers would lend to them jump as high as 25 per cent.
The move sent a clear and painful message to banks overly reliant on short-term funding: clean up your act.
Over the past few years, Minsheng has tapped several lending methods to try to bolster its returns, including heavy usage of something called a reverse repo, which allows a bank to mask the amount of money it is putting at risk. The bank sharply increased the amount of high-yield investment vehicles it sells, known as wealth management products.
Minsheng's borrowing has prompted concern from analysts and illustrates the type of banking behaviour the PBOC is trying to stamp out.
Investors have been quick to punish Minsheng. Its Shanghai-listed shares have dropped 16.7 per cent, wiping out US$6 billion worth in market value, since Wednesday last week.
Minsheng said on Wednesday the rise in the Shanghai interbank offered rate had not disrupted operations and it was confident it could control credit risks.
Short sellers are betting on a further drop in Minsheng's shares. As much as 61.8 per cent of Minsheng's Hong Kong stock that can be borrowed - a measure of interest from short sellers - was out on loan on Tuesday, according to data provider Markit, compared with a market average of about 15.3 per cent.
Minsheng, the country's ninth-largest bank by assets and the only private bank among the 10 largest commercial lenders, debuted on the Hong Kong stock exchange in 2009. At the time, Beijing was forcing banks to pump loans into the market to help firms ride out the global financial crisis.
The stimulus pushed up inflation, prompting an order from Beijing to pull back on loans starting around 2010. Banks then started looking for new lending mechanisms, while customers sought products that promised a better return than a state-mandated 3 per cent interest rate.
At the end of last year, Minsheng's interbank funding for less than one year accounted for 29 per cent of its non-equity liabilities, the highest among the Chinese banks Bernstein Research covers. Nearly a third of its money is from short-term borrowing from other banks, which is risky and expensive.
Another concern surrounding Minsheng is its use of a lending tactic called the reverse repo. The popular structure allows banks to lend to a company, which provides discounted bills as collateral to a third-party bank acting as a guarantor.
Because the lending bank's exposure is to that guarantor bank rather than the borrower, the lender can classify the transaction as "interbank business". That kind of transaction comes with a 20-25 per cent risk weighting on a bank's balance sheet, instead of the full 100 per cent weighting for straight loans.
Only loans with full risk weighting count towards Beijing's mandated 75 per cent loan-to-deposit ratio that limits how much banks may lend. So the reverse repo allows a bank to disguise a full loan as a partial loan, pushing its effective loan-to-deposit ratio well above the state-mandated level.
Minsheng's use of the device increased 376 per cent last year, Barclays said in a note last week. It said that at 23 per cent of assets, Minsheng has the second-highest exposure to reverse repos of the Chinese banks it covers.
Another of the reasons for the PBOC's actions last week is the proliferation of wealth management products. Such vehicles package assets, offering a 4 per cent to 5 per cent return over a short-term duration.
One concern was banks were using short-term cash to help manage payouts of the products, creating a dangerous mismatch of short- and long-term liabilities.
The sales volume of new wealth management products launched by Minsheng last year grew 43 per cent to more than one trillion yuan (HK$1.25 trillion), its annual report says.
Some 40 per cent of the loans made by the bank must be repaid on time for it to meet short-term cash outflows, said Charlene Chu, senior director at Fitch Ratings. That compares with zero at three of China's biggest banks.