Thu, Feb 18, 2016 page14

• Opaque receivables could incur losses: Commerzbank

  • Bloomberg
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  Chinese lenders are reacting to a regulatory crackdown on shadow financing by increasing activity in their more opaque receivables accounts, a practice Commerzbank AG estimates might result in losses of as much as 1 trillion yuan (US$153.3 billion) over five years.

  Banks are increasingly using trusts or asset management plans to lend and recording them as funds to be received rather than as loans, which are subject to stricter regulatory oversight and capital limits.

  The German bank’s forecast is based on total outstanding receivables of about 11.5 trillion yuan.

  

  A man talking on a mobile phone walks past a branch of the Industrial and Commercial Bank of China in Beijing yesterday.

  Photo: EPA

  “Chinese banks haven’t provisioned for receivables and those are essentially riskier loans,” Commerzbank credit analyst He Xuanlai (賀烜來) said in Singapore. “The eventual losses will have significant impact on China’s economy, because you could have contagion risk in the banking sector.”

  Official data show nonperforming loans at Chinese commercial banks jumped 51 percent last year to a decade-high of 1.27 trillion yuan amid a stock market rout and the worst economic growth in a quarter century.

  While Moody’s Investors Service does not expect a banking crisis in China in the next 12 to 18 months, it said in a Jan. 26 note that it does see higher loan delinquencies, more defaults on corporate debt and some losses in wealth management products.

  “The receivables portfolio in Chinese banks is opaque, so we can’t make an assumption on the asset quality,” Moody’s Hong Kong-based analyst Christine Kuo (郭書岑) said. “Provisions for receivables are indeed very low compared to that for loans. We tend to think that the Chinese government is likely to provide support if there is any sign of a crisis.”

  China CITIC Bank Corp’s (中信銀行) assets under receivables tripled from 300 billion yuan at the end of 2013 to 900 billion yuan by June 30 last year, according to the bank’s financial statements.

  Concerns about Chinese banks’ creditworthiness are mounting, with the cost of insuring Industrial and Commercial Bank of China Ltd’s (ICBC, 中國工商銀行) debt against default reaching an all-time high of 199.5 basis points on Jan. 21.

  The bank’s 6 percent perpetual notes that count as additional tier 1 capital fell to a record low of US$0.99 on Thursday last week.

  The yield spread on China CITIC’s US$300 million 6 percent 2024 notes surged to a one-year high of 337 basis points over US Treasuries on Monday.

  Calls to China CITIC’s media department went unanswered. ICBC Beijing-based corporate communications officer Wang Zhenning (王振寧) declined to comment.

  Lenders’ on-balance sheet shadow financing grew 25 percent last year, a jump from 15 percent in 2014 when regulators began cracking down on shadow banking exposure, according to research house Sanford Bernstein & Co.

  While traditional shadow financing, such as lending to local governments and property developers, is declining, new forms are rising, such as bill financing packaged into wealth management products, Sanford Bernstein & Co analyst Hou Wei (侯煒) said in Hong Kong.

  His estimate for potential losses is about 400 billion yuan.

  Banks’ shadow financing assets, mostly in wealth management products and trusts, now tend to be more highly leveraged, Hou said.

  Smaller banks, which account for half of all loans, are more exposed than the big five state-owned lenders, Hou said.

  “Now the biggest risk is the sudden dry-up in liquidity caused by capital outflow and higher leverage,” he said.

  Outstanding repurchase agreements in China’s interbank market, used by debt investors to amplify their buying power, soared to 9.73 trillion yuan in December last year, the highest level since at least 2012, before edging down to 8.1 trillion yuan last month, according to data from ChinaMoney.

  Risks are large in the receivables items, CreditSights Inc credit analyst Matthew Phan said in Singapore.

  “The provision requirement is less strict for such assets, which are typically loans to the property and overcapacity sectors,” Phan said.

  In the latest official data released on Monday, the industry’s bad loan ratio climbed from 1.25 percent to 1.67 percent. New yuan loans last month jumped to a record high of 2.51 trillion yuan, as banks front-loaded their lending targets this year.

  “Corporate leverage is rising and around 70 percent of bank loans in China go to corporations,” Kuo said. “Until we see corporate leverage and profitability stabilize, we will likely see bank assets continue to deteriorate.”
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