China’s Bank Regulators Move To Shore Up At-Risk Rural Banks

China’s Banking and Insurance Regulatory Commission (CBIRC) is encouraging investors such as companies and non-bank financial groups to acquire and provide additional capital to shore up at-risk rural banks, according to Reuters.

Regulators are also pushing for mergers and encouraging bank founders to take larger stakes and dispose of non-performing loans.

“A small group of rural banks have become high-risk financial institutions in recent years due to various factors, seriously affecting and limiting their sustainable development and financial service capabilities,” the CBIRC said, according to Reuters.

Regulators are also looking into converting certain high-risk rural banks into branches for larger state-owned or joint-stock banks. If a bank is deemed severely distressed, local regulators will be able to push for a restructuring, assist in a takeover or shut down the bank entirely, the report noted.

China had a total of 1,641 rural banks in 31 provinces at the end of September, Reuters added.

After nearly a decade of strong growth, China’s banks have been under significant stress since the COVID-19 pandemic took hold last year.

Reuters reported in August that China’s banks have been hard-hit as loans have gone sour and the country’s financial institutions gear up for more bad debt. In addition, the Chinese government has pressured the banks to forego 1.5 trillion yuan ($212 billion) in profit this year by lowering lending rates and fees and deferring loan payments.

“Banks had it easy in the past, but now many signs indicate they’re under great pressure,” said Hong Hao, head of research at BOCOM International. He told the news outlet in August that “the pandemic has hit small businesses hard … the balance sheets won’t be pretty.”

In late August, five of China’s largest state-owned lenders reported their biggest profit losses in at least a decade, as the number of defaulted loans has skyrocketed since the pandemic began.

CNBC reported on Aug. 31 that the Bank of China, Bank of Communications, China Construction Bank, Agricultural Bank of China and Industrial and Commercial Bank of China posted at least 10 percent year-over-year declines from January through June 2020.

During 2020’s first two quarters, these lenders have also set aside more cash in expectation of forthcoming loan losses. In addition, the Beijing government has asked banks to forfeit 1.5 trillion yuan ($219 billion) in profits by decreasing lending rates and deferring loan repayments in a bid to help companies, CNBC noted.

The action has put these banks at the forefront of the nation’s effort to ease the impact of the coronavirus on businesses and families. 

“The banks have been asked to perform [a] national service,” Jason Tan, research analyst at CreditSights, the New York-based market insight firm, told Squawk Box Asia. “They’ve been asked to support the economy at the expense of their own operational strength.”

Still, Tan noted that the total amount of the losses is unclear, as more losses are expected from July through December 2020 – and perhaps the first half of 2021, when loan moratoriums expire.

“The brunt of the asset quality pressures might not have come through yet because of the still existing moratorium on the repayment of loans as well as its interest payments,” Tan told the network in August.

The first-half 2020 profits of China’s commercial banks overall fell 9.4 percent, while the six biggest saw a drop of 12 percent in profits from the same period in 2019, according to CBIRC data this summer.