Employees of a local bank in Jinzhou, Liaoning province, practice their smiling skills with chopsticks. (Photo/China Daily)
Surge in non-performing loans increases capital pressure for local banks, say industry sources
Eight of the country's largest regional city commercial banks have submitted initial public offering applications since June 2014, according to the China Securities Regulatory Commission.
Among them, Harbin Bank Co Ltd－which is already listed on the Hong Kong Stock Exchange－plans to issue 3.67 billion new A shares, which would represent nearly a quarter of its total shares in circulation.
Harbin Bank was joined on the list recently by Bank of Xi'an Co Ltd, the Shaanxi province-based lender, which held a general shareholders' meeting on Monday to discuss a possible IPO in Shanghai.
Wen Bin, principal researcher at China Minsheng Banking Corp, said regional city lenders are keen to go public because they are facing greater capital pressures after rapid expansions in recent years.
Statistics from the China Banking Regulatory Commission show the total assets of China's regional city lenders had reached 21.2 trillion yuan ($3.33 trillion) by the end of September, a 23.96 percent rise from 2014.
That asset growth compared with 9.88 percent for the country's large State-owned commercial banks, and 19.59 percent for joint-equity commercial banks.
Zeng Gang, director of banking research at the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said: "The rapid growth of these regional lenders has led to huge demand for capital.
"Going public is considered a key channel to replenish capital levels, especially at this time, when the banking regulator has been toughening its stance on capital adequacy requirements."
The CBRC raised the minimum capital adequacy ratio for non-systematically important banks－whose failure is unlikely to trigger a wider financial crisis－from 8.5 percent by the end of 2013 to 9.3 percent by the end of 2015.
In recent years, the larger regional city lenders recorded annual asset growth rates of between 30 and 40 percent, which raised capital requirements and also levels of risk, Zeng said.
Compared with other financing routes such as private equity, IPOs can raise larger amounts and are viewed as representing a more sustained capital replenishment method for banks, through possible refinancing or preferred share issuance.
"Going public optimizes banks' corporate governance structures, increases their transparency, standardizes management and improves competitiveness, especially at this time when they face restrictions in the capital market, rather than the local government interference they might have in the past," he said.
Wu Qing, deputy director of banking research at the Development Research Center of the State Council, said many regional city banks need to replenish capital levels to counter rising nonperforming loans.
According to the CBRC, outstanding NPLs of regional city lenders reached 121.5 billion yuan by Sept 30, up from 85.5 billion yuan at the end of 2014. Their NPL ratio increased 28 basis points to 1.44 percent during the same period.
Zeng said many of the banks actually started preparing for an IPO in the A-share market several years ago－but the door remained closed from 2008 until January 2014, and then was suspended again from early July to Nov 6 this year amid abnormal fluctuations in the stock market.
Zhong Wei, a finance professor at Beijing Normal University, also warns the stock performance of regional city banks may not be good, once they do list.
"The business capability and competitiveness of some have not improved, despite their rapid expansion.
"Most mid-sized regional lenders are worth less than 1 trillion yuan, so they are also likely to become takeover targets for larger banks," he said.
An added pressure, said Zhong, is that with the ongoing economic slowdown and interest rate liberalization likely to continue, and NPL ratios still rising, "investors cannot expect good returns from the new shares" for at least three years.
