China drafts tougher capital rules for too-big-to-fail banks

Bloomberg

China’s financial regulators plan to impose additional capital requirements on the nation’s systemically important banks, seeking to curb risks and safeguard stability of the $49 trillion industry.
Banks considered too big to fail will be put into five categories and face a surcharge of between 0.25% and 1.5% on top of the mandatory capital adequacy ratios, the People’s Bank of China (PBOC), and the China Banking and Insurance Regulatory Commission said in a draft rule.
Lenders will also need to make detailed plans on how to recover from a crisis, as well as draft living wills with disposal plans in case they can’t operate as an ongoing entity.
Chinese authorities have started to evaluate systemically important banks this year by measuring assets of the nation’s 30 largest lenders. The firms will also be scored by their interconnectedness with other financial institutions, and the complexity of businesses such as derivatives and wealth management operations.
While the move is aimed at bolstering the financial strength of China’s biggest banks and reduce systemic risks, it may widen the funding gap at some lenders.
Industrial & Commercial Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp. and Agricultural Bank of China Ltd. are all considered global systemically important banks, or G-SIBs. They need to find as much as $990 billion by 2024 to meet global capital requirements designed to protect the public and financial system against massive bank failures, S&P Global Ratings estimated last year.
G-SIBs in emerging markets must have liabilities and instruments available to “bail in” the equivalent to at least 16% of risk-weighted assets by January 1, 2025, rising to 18% in 2028, according to the Basel-based Financial Stability Board. Banks in developed markets met the first phase in 2019.
The CBIRC currently requires big state-owned lenders to have a minimum capital adequacy ratio of 11.5%, while smaller rivals need 10.5%.
The draft rules are pending public feedback until May 1.

Bank of Communications posts 49% Profit Rise
China’s largest banks extended their share rally after unexpectedly delivering their biggest jump in quarterly profits in at least a decade, boosted by rising demand for credit and easing bad-loan pressure as economic growth accelerates out of the pandemic.
Reporting their earnings, Industrial & Commercial Bank of China Ltd, China Construction Bank Corp, and smaller rival Bank of Communications Co all posted gains in net income of at least 44% in last three months of 2020, far exceeding analyst estimates.
After suffering through worst earnings slump as they were enlisted to help millions of borrowers struggling during pandemic with cheap loans, China’s $50 trillion banking industry is now being allowed to return to more prudent growth and risk management. With virus largely
contained, policy makers have renewed a campaign to contain risks, easing stimulus and
propelling interest rates higher.
Appetite for Chinese bank stocks, long regarded as perennial laggards, is growing as investors hunt for cheaper parts of the market to escape stimulus-fuelled valuations.
The CSI 300 Banks Index has climbed nearly 10% this year and is trading near the highest in 14 years. In Hong Kong, shares of the largest banks including ICBC and Construction Bank also outperformed the benchmark Hang Seng Index.

“We see large chance for banks to achieve double digit earnings in 2021” due to lower non-performing loan formation and improving net interest margin, Jefferies Financial Group Inc. analysts Shujin Chen and Alfred He wrote in a note on Monday. They also expect bank shares to outperform in the second to third quarters.
Appetite for Chinese bank stocks, long regarded as perennial laggards, is growing as investors hunt for cheaper parts of the market to escape stimulus-fuel;ed valuations. The CSI 300 Banks Index has climbed nearly 10% this year and is trading near the highest in 14 years. In Hong Kong, shares of the largest banks including ICBC and Construction Bank also outperformed the benchmark Hang Seng Index.
Still, Chinese banks’ price-to-book valuations remain near record low. ICBC changed hands at 0.56 times forecast book value, compared with 1.8 times for JPMorgan Chase & Co. and 0.7 times for HSBC Holdings Plc.
China International Capital Corp. analysts led by Zhang Shuaishuai forecast over 50% upside potential for ICBC and Construction Bank shares over the next fewr quarters, with the Chinese economy expected to grow about 9% in 2021.
Expectations that Beijing will ease up on requiring that lenders support pandemic-hit firms, coupled with the prospect of rising interest rates, are seen bolstering earnings. The four largest Chinese banks may report a 6% increase in combined profit this year, according to a consensus estimate compiled by Bloomberg.