Banking & Finance

Agricultural Bank of China leads push among China’s big five banks to set up debt-to-equity swap arms

PUBLISHED : Wednesday, 23 November, 2016, 8:45pm
UPDATED : Wednesday, 23 November, 2016, 10:52pm

Chinese state owned banks have started to establish their own asset management arms to conduct debt-to-equity swap business for their peers, reflecting progress by domestic banks in handling the soured loans.

Agricultural Bank of China, the country’s third largest lender, will set up a fully owned subsidiary named ABC Asset, to conduct debt-to-equity swap business with registered capital of 10 billion yuan, according to a filing to Hong Kong Exchanges & Clearing on Tuesday evening.

ABC Asset’s business includes acquisition of debt assets, converting debt into equity, holding, managing and disposing equity in debt-to-equity swap enterprises, according to the statement.

The plan is pending regulatory approval, the bank said.

The plan will help ABC gradually transform its business model away from lending, and enhance its competitiveness, the bank said.

CCB and China Minsheng Banking Corp are also setting up similar structures, the Post reported last month, but ABC is the first to announce the proposal to the stock exchange.

More Chinese banks set up own bad-loan asset management companies

China’s Big Five banks, including Industrial and Commercial Bank of China, China Construction Bank, ABC, Bank of China and Bank of Communications are all planning to set up their own asset management subsidiaries for the debt-to-equity swaps, mainland media Caixin reported on Wednesday.

The subsidiary can help avoid moral hazard by separating the debt-to-equity operation from the banks’ normal business operations, Caixin reported, citing an insider at one of the big five banks.

Each subsidiary will have a registered capital of approximately 10 billion yuan from the parent bank. They will help other banks to transform their bad loans into equity, in line with government guidelines.

According to the new guidelines released by State Council in October, banks are encouraged to transfer loans to external agencies, which will then convert the loans into equity. The guidelines also encourage banks to set up subsidiaries for the “cross swap” with other lenders’ asset management arms.

Mainland banks listed in Hong Kong rallied on Wednesday, although the Hang Seng benchmark traded flat.

The original creditors can quickly improve their balance sheets by shifting the soured loans to the subsidiaries of its peers, Iris Pang, Hong Kong based senior economist at Natixis said.

“They are obviously receiving a windfall,” Pang said. “The corporate risks are no longer at banks but at the investors [of the swapped equities].”

Investors can be various parties, including households and those who bought wealth management products that hold stakes in the swapped equities, she said.

Zhang Minghe, CCB’s executive in charge of the country’s first debt-for-equity swap scheme, said that it welcomes foreign investors to participate in the project, Reuters reported earlier this week.