Analysts downgrading China’s small banks at record pace

Bloomberg

Analysts are taking note of the struggles in China’s banking industry, which is being battered by an official deleveraging drive.
At least five smaller lenders have been downgraded by credit-rating companies this year, a record pace for the sector. Spikes in the volume of non-performing loans and an increase in loans overdue are among the reasons. One of the lenders Guiyang Rural Commercial Bank saw its bad debt balloon nearly tenfold in the space of two years, according to the assessor that slashed its rating.
China’s campaign to clean up its financial industry and crack down on a $10 trillion shadow-banking system is a double whammy for smaller lenders: it’s pushing up the costs for them to seek funding from each other, and makes their investments in opaque asset-management plans less secure. Recent regulatory moves to widen the definition of non-performing loans also added to the strain, forcing some banks to report more bad debt and a reduction in their capital-adequacy ratios.
“Small and medium banks are the weakest link in the deleveraging process, because of a lack of deposits and their dependence on market funding,” said Grace Wu, head of China bank ratings at Fitch Ratings Ltd. in Hong Kong. “Because the lenders do a lot of business with non-bank financial institutions, their own risks can become contagious and affect the whole system.”
Other lenders that have been downgraded include Jilin Jiaohe Rural Commercial Bank Co., whose 3 billion yuan ($443 million) of investments in wealth management products were troubled by a default earlier this year. Shandong Zouping Rural Commercial Bank Co. saw a rating cut from Golden Credit Rating International Co. after its non-performing loans ratio surged to 9.3 percent last year from about 2 percent in 2016.
Guiyang Rural Commercial’s asset quality is improving, and it will deal with its bad loans in accordance with regulatory requirements, an official at the bank who asked not to be named said by phone on Thursday. Zouping declined to comment, and several calls to Jiaohe’s press department weren’t answered.
Ratings companies have also cut their outlook for at least six smaller lenders to negative from stable since the start of 2017, citing reasons including deterioration of asset quality and weaker profitability, Industrial Economics Research & Consulting Co.
analysts led by Xu Hanfei said.
Chinese policy makers made their latest move to crack down on shadow financing with the government issuing draft rules to regulate banks’ issuance of wealth management products.

More Downgrades
Rural commercial banks’ non-performing loan ratio jumped to 3.3% at end of March, compared with 2.6% two years ago, according to official data. The ratio for large commercial banks and joint-stock lenders in the first quarter stood at 1.5% and 1.7%, respectively, the data show.