Banks in China analysis: are smaller lenders about to collapse?
Growth is slowing – and this is bad news for banks in China. Analysis suggests that 40 per cent of loans at some lenders are non-performing
While business is booming for bigger banks in China, analysis shows that the picture is a lot less bright for small and medium-sized lenders. Although the International Monetary Fund predicts the economic superpower’s GDP is expected to grow by 5.8 per cent in 2020, this is much slower than the 6.1 per cent that had been initially forecast. Growth levels have been cooling for some time – and according to S&P Global, the country’s smaller financial institutions are woefully underprepared for this slowdown.
Warning signs that the outlook for banks in China isn’t rosy have been there for some time. Recently, there have been a slew of bank runs on small, local lenders – with worried customers queuing around the block to withdraw their savings from branches. In the case of Yingkou Yanhai Bank, the panic seems to have begun when rumours started to circulate on social media that the business was in deep financial crisis. Nine people have since been arrested for making “inappropriate remarks” that may have led to that bank run.
All of this comes after three regional banks were granted a bailout by Beijing. Hengfeng Bank, Baoshang Bank and Bank of Jinzhou were all left in the lurch as levels of bad debt started soaring. China’s own National Audit Office has estimated that 40 per cent of the loans on the books of some banks are non-performing – and given how anything more than 5 per cent is regarded as a warning sign, it’s fair to say that parts of the sector isn’t in the rudest of health right now.
Banks in China: predictions
According to some analysts, embattled Chinese banks shouldn’t expect to get the prized lifeboat of a bailout handed to them on a silver platter. According to S&P Global, many problematic banks will end up exiting the market altogether as 2020 gets into full swing. That said, its analysts believe that Beijing will be keen to ensure that these failures are carefully stage managed through restructuring or mergers, for fear of spreading panic through the economy.
But why are smaller banks in China forecast to fail in particular? Well, analysts say that these financial institutions have struggled to adapt to tightening regulations, take bigger risks, have weaker governance standards, and fail to underwrite loans adequately. It’s also worth noting that levels of economic growth aren’t consistent throughout the whole of China, meaning some cities and regions are being left behind. Areas such as Xinjiang, Tibet, Hainan and Liaoning have been identified as especially vulnerable when it comes to disappointing levels of growth.
Alarm bells are also starting to ring because of how many banks have been failing to publish their annual reports for 2018 in a timely fashion. According to S&P Global, at least 19 institutions submitted these documents late – or didn’t do so at all. When compared with the overall market cap of banks in China, these institutions reflect just 1.8 per cent of total assets. Nonetheless, such a lack of disclosure is a cause for concern – and overall, 4 per cent of total assets in the country’s banking sector belong to troubled lenders.
As S&P Global analysts said: “Chinese authorities have a difficult road ahead as they develop strategies to fix the country's problem institutions without spooking markets.”
In its report, S&P Global says it believes regulators will be sympathetic to an extent as smaller banks grow accustomed to stricter rules to prevent bad loans from becoming prolific. The organisation’s forecasters also predict a much different outcome for financial institutions that struggle to reform. While authorities in the US closed a whopping 465 banks in the aftermath of the recession, S&P Global says it doesn’t anticipate that Beijing would go down a similar route.
When it comes to the question of whether things are going to get better for small banks in the future – especially if the economy begins to bounce back – the answer isn’t all that certain. Although China does now offer deposit protection, ensuring that the savings of consumers are kept safe, this policy was only introduced in 2015. Convincing the public to make the big switch from larger financial institutions to a less well-known upstart might be an uphill struggle.
In order to inject internationally accepted levels of capital into banks in China, analysis suggests a whopping $339 billion would be required to achieve the recommended ratio of 12.5 per cent. With the sheer volume of non-performing loans in the marketplace, and the fact that existing investors are likely going to think twice about any opportunity to buy new shares, smaller banks may end up finding it difficult to secure the financing they need to ride the storm.
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