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RETAIL BANKING | Roxanne Uy, China
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Deposit woes continue to haunt China’s banking sector

In a recent teleconference, Fitch analyst Charlene Chu warned earnings growth is not strong enough and banks will be forced to raise equity.

According to Ms Chu, it’s important to distinguish that today’s banking system is different from the pre crisis banking system. In the past, the banks always had this very large amount of excess deposit on hand and they always had a lot of resources that could be mobilized literally overnight into lending. But today, funding and liquidity has gone tight enough that the banks do not have that same ability to just mobilize resources into credit in the way they used to in the past.

Ms Chu also noted that required reserve ratio (RRR) cuts will happen periodically over the course of the year but they are actually not really a signal of loosening. "It's a signal of simply giving the banks resources they need to extend the credit that we all expect they're going to extend. I know the market is not really interpreting it this way but that is the reality. The triple R will be reduced simply so that the banks will have money on hand that they need to do what the government is expecting it to do on the credit side," she added.

"In terms of equity financing, I know we’ve got some banks who request for that. And I think this is something we’ve always highlighted over the years, that there is constant downward pressures on capital ratios in China because earnings, even though earnings growth is quite strong, is still not keeping up with the pace of growth of the system. Definitely some banks will have to raise some equity," said Ms Chu.

Here's more from Fitch Ratings:

Funding, Liquidity to Dominate: Tightening funding and liquidity will be the dominant themes in 2012, as deposit strains intensify and banks try to balance rising forbearance burdens with pressure to lend in support of growth. The year will reveal just how vital plentiful liquidity has been to the stability of the Chinese banking system, and how difficult things can become when that abundance is absent. Fitch expects banks to require large funding support to meet credit and forbearance needs, as well as their own growing obligations.

Forbearance Burdens to Rise: As the economy slows, corporate profits fall, and more loans extended during the credit boom come due, deterioration in asset quality is expected in several segments of the loan portfolio. Over the near term, Fitch expects that the authorities will continue a policy of forbearance and liquidity support for borrowers. As a result, asset-quality issues may not appear fully in NPL ratios until well into a deterioration, if at all. Still, the fall in cash inflows from these loans will add pressure to banks‟ cash positions, which are already thin.

CNY16.5trn of New Financing: Based on a forecast of 8.2% real GDP growth in 2012, new financing should reach upwards of CNY16.5trn – based on Fitch‟s adjusted-Total Societal Financing (TSF) measure. While large, this is below the CNY17.5trn estimated for 2011, meaning credit conditions will continue to feel tight – in contrast to the easing that many are expecting. This reflects a mixture of moderating GDP growth, ongoing property curbs, resource constraints from thin financial sector liquidity, and a desire to avoid a repeat of 2009‟s excesses.

Lending Could Reach CNY9trn: Of the CNY16.5trn in new financing, as much as CNY9trn could come in the form of new renminbi and foreign-currency loans. This estimate, above other forecasts, reflects the view that as liquidity tightens and regulatory scrutiny rises, non-banks and offshore banks could find it more difficult to continue providing large financing to Chinese companies. Greater SME lending by banks also could reduce demand for non-bank credit, while the crackdown on some off-balance-sheet activity suggests less credit via these channels.

If the growth of “shadow financing” does indeed decelerate, Chinese banks are likely to be called on to fill the gap in order to maintain GDP growth, leading to higher lending than current consensus forecasts of CNY8trn. New loans of CNY9trn would represent loan growth of 15.5%, which is in line with previous periods of a modestly expansionary policy.

CNY4trn Assistance Required: Chinese banks possess an estimated CNY21trn in capacity to extend new loans, roll over existing loans, and provide forbearance. While seemingly ample, this can be exhausted quickly as CNY22trn in existing loans will be coming due in 2012 – some of which will require forbearance and others which will be re-extended to good existing borrowers (every CNY1 not received from, or re-extended to, existing borrowers means CNY1 less in new credit). For this reason, substantial funding assistance will be required.

Fitch forecasts CNY4trn in liquidity assistance in 2012 via a combination of reserve requirement reductions, central bank reverse repos and auctions of MOF deposits. Reserve requirement relief may not always take the form of blanket, system-wide required reserve ratio (RRR) cuts, but rather targeted releases to banks in need. In this context, the nominal balance of deposit reserves at the central bank could be a more useful indicator in signalling policy than the RRR ratio.

What Could Change the Outlook

IDRs Stable, VRs Pressured: The Long-Term IDRs of Chinese banks are based on expectations of varying degrees of state support, and any revisions would be tied to shifts in the sovereign‟s perceived ability or willingness to provide such support. The VRs of some banks could be revised down in 2012 if liquidity and funding erosion accelerates, or asset-quality deterioration begins to threaten solvency. The most vulnerable ratings are those of smaller banks with weaker liquidity, less deposit funding, and lower capital.

 

If you wish to contact the journalist, you can email her at roxanne@charltonmediamail.com

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