China’s first government takeover of a bank in more than two decades has underscored the potential for increased stress at regional lenders that piled into off-book financing in the past few years.
Regulators on late Friday said that they would assume control of Baoshang Bank Co (包商銀行) for one year because of “serious” credit risks.
The Inner Mongolia-based lender, once seen as a model for funding regional economies, is one of many smaller Chinese lenders that used shadow-financing techniques to obscure their exposure to risky borrowers, analysts said.
While China has been cracking down on such techniques, UBS Group AG analyst Jason Bedford said that the country is rife with regional banks that used special-purpose vehicles to circumvent lending restrictions and hide the true state of their bad loans.
Shares of big Chinese lenders might be vulnerable to the fallout on concern that they will be asked to help resolve problems at smaller peers, Sanford C. Bernstein & Co said.
Regulators face a difficult balancing act as they try to clean up risky lending practices without sinking the world’s second-largest economy amid a trade spat with the US.
Baoshang’s troubles stemmed in part from its heavy exposure to a small number of borrowers, said Bedford, executive director of Asian financials research at UBS in Hong Kong.
There are other banks in similar situations, he added.
Chinese media discussions of the takeover have focused on ownership links between Baoshang and Tomorrow Group (明天集團), the conglomerate whose former chairman Xiao Jianhua (肖建華) has been in custody for more than two years, Sanford C. Bernstein analysts wrote yesterday.
The analysts said that there has been no public disclosure of such a connection, or of any role by Tomorrow in Baoshang’s financial position.
As part of the government clampdown, banks have been forced to reclassify loans overdue for more than 90 days as non-performing, a move that led to a record surge in soured debt and wiped out capital at some small lenders.
China Construction Bank Corp (CCB, 中國建設銀行), the nation’s second-largest lender, would be responsible for managing Baoshang’s business while it is under government control, regulators said on Friday.
Founded in 1998, Baoshang has more than 8,000 staff and reported total assets of 576 billion yuan (US$83 billion) at the end of September 2017 — a fraction of CCB’s 23 trillion yuan last year.
The smaller bank’s so-called investment receivables, which analysts have said are often loans disguised as investments, stood at 153 billion yuan, accounting for more than one-quarter of total assets.
“Low-quality, small regional banks are unlikely to pose systematic risks to the financial system or the operations of the big SOE [state-owned enterprises] and joint stock banks,” Sanford C. Bernstein analysts Linda Sun-Mattison and Jason Li (李卓卿) wrote in a note yesterday.
“However, the bailout of Baoshang Bank, a rare move by the government, and the involvement of CCB will no doubt heighten investor concerns over SOE banks’ risk exposure to national service,” they wrote.
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