China’s banks need coordination for debt-equity swaps, CCB says

China Construction Bank’s chairman also predicts banking industry profits to remain flat in 2017

PUBLISHED : Wednesday, 18 January, 2017, 7:02am
UPDATED : Wednesday, 18 January, 2017, 7:02am

China Construction Bank, which is awaiting government approval for a 12 billion yuan fund for buying out bad loans, said the country needs a framework to coordinate debt-for-equity swap programmes among Chinese lenders.

“There’s definitely the need for a panel to coordinate plans among different banks, because the debt structures of some of these Chinese companies are very complicated,” said Wang Hongzhang, chairman of the second-largest Chinese lender by assets, at the 2017 Asian Financial Forum in Hong Kong.

Wang’s comments underscore the challenges facing the Chinese government’s programme to cut corporate debt by 120 trillion yuan (US$18 trillion) to preserve the country’s financial system.

Already, CCB is involved in exchanging more than 100 billion yuan of borrowings by companies into equities, entangled in various legal issues and policy uncertainties.

Chinese banks are barred from owning direct stakes in non-financial companies, a restriction that compels banks to establish their own asset management units to handle these stakes.

The Beijing-based bank has an asset-management unit with 12 billion yuan in seed capital awaiting approvals. In addition, it has agreed to swap 50 billion yuan of debt owed by three state-owned mining and energy enterprises in Shaanxi province for equity stakes this month.

The bank was in the leading role in the latest round of government campaign to clean up bad loans, exchanging almost 5 billion yuan of borrowings to Yunnan Tin Group for a stake in China’s largest producer of the metal.

This spate of swaps has created a new problem: finding the talent to manage the companies once the lender becomes a shareholder.

“We will have to deeply participate in the business of the borrowers,” Wang said. “If we can’t help borrowers turn around their businesses, they will be in trouble again in a few years.”

These challenges are weighing on an industry that’s seeing flat earnings after years of bumper profits from an arbitrage between lending and deposit rates.

The combined profit of China’s five biggest banks rose 0.8 per cent in the third quarter of 2016, compared to a year earlier, the smallest quarterly gain in decades. The industry may repeat the lacklustre performance in 2017, Wang said, amid a government-imposed deleveraging mission to squeeze excess capacity out of the economy.

Non-performing loans (NPL) stood at 1.49 trillion yuan at the end of September, adding to the 11-year-high of 1.44 trillion yuan from a quarter earlier. The NPL ratio rose to 1.76 per cent of total lending, according to the China Banking Regulatory Commission’s data.

We will have to deeply participate in the business of the borrowers. If we can’t help borrowers turn around their businesses, they will be in trouble again in a few years
Wang Hongzhang, chairman, China Construction Bank

Amid the gloom, CCB had been an outperformer, chalking up the best performance among China’s four largest banks. First-half profit rose unexpectedly by 1.1 per cent to 133.41 billion yuan, as CCB kept its bad loans in check.

The bank had been working on a transformation, Wang said, through which it aims to expand the “light asset” business, referring to services including asset management, investment banking and intermediating, which could relive the capital adequacy pressure.

“We are also considering spinning off some subsidiary for initial public offering, to replenish the capital,” he said, without giving more details.

The outlook for 2017 will see a decline in bad loans, Wang said, which creates room for the bank’s profit to improve.

“Our internal analysis found small and medium enterprises (SMEs) have better credit profiles than big companies, so we have been adjusting the loan structure since 2012, and put the emphasis onto loans below 5 million yuan,” he said.