INVESTMENT BANKING | Staff Reporter, China

Which Chinese banks are most vulnerable to WMP shocks?

They account for 41.4% of the total market share of WMPs.

BMI Research analysts reiterate that Chinese jointly-owned banks are highly vulnerable to liquidity and asset quality shocks due to their significant exposure to WMPs.

"Our estimates using latest data from Chinawealth's report show that this category of banks is the highest contributor to overall WMP growth over the past two years, and it has the largest market share of WMPs, accounting for 41.4% of the total as of June 2016."

Here's more from BMI Research:

WMPs are often used as a source of off balance-sheet funding for Chinese banks, and jointly-owned banks are increasingly reliant on them as compared to deposits. We calculate that the average ratio of overall off-balance sheet WMPs as a share of total deposits for the nine listed jointly-owned banks rose to almost 40% in H116, which was around double from the 20.4% figure printed in 2014.

In an effort to boost their profitability, Chinese banks have also been investing in WMPs issued by their peers, and therefore, they are highly exposed to potential losses, especially as more than three-quarters of the WMP market comprise of non-principal guaranteed floating rate instruments.

We highlight that the Tier 1 capital adequacy ratios of jointly-owned banks are only slightly above the regulator's minimum requirement of 9.5%, with the average ratio of the eight listed banks coming in at 9.9% in Q316.

With potential credit risks being elevated in the mainland economy due to the structural slowdown, these banks not only have to contend with default risks from WMPs, but also worsening asset quality due to rising NPLs.

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