New Fears Over China’s Regional Banks As EY Quits

China’s community banks are raising new fears over the health of the industry after auditor Ernst & Young resigned from its work with regional bank Bank of Jinzhou.

The Wall Street Journal reported Monday (June 3) that EY submitted its resignation letter to the bank after the institution did not provide sufficient documentation over certain loans under review by EY. Reports noted that EY found evidence that proceeds from the loans may not have been used for their stated purpose, and according to a filing from the bank, Bank of Jinzhou could not reach an agreement with EY to resolve the issue.

Reports said the decision for EY to quit is the latest event to raise concerns over China’s community banking sector.

Last month, the government took control of a struggling regional bank, Baoshang Bank, marking the first such event in more than two decades. The publication said the takeover resulted in higher interbank lending rates on mainland China last week.

In the last year, small and mid-sized banks in China have seen increases in nonperforming loan ratios, the result of government rules to classify loans more than 90 days past due as nonperforming.

For Bank of Jinzhou, that means $1.2 billion of loans at risk of default, worth 3.3 percent of its loan portfolio — a significant increase from early 2018, reports said.

Despite concerns, the People’s Bank of China said the takeover of Baoshang Bank was an “isolated incident,” reports said. The central bank urged investors and the public to look at the case “objectively and calmly.”

“Everyone, please don’t worry,” the central bank reportedly said at the time. “At present we don’t yet have this plan” to introduce revised policy that could make government takeovers of struggling banks more common.

As some fears increase over China’s community banking space, the government is allowing more foreign entities to obtain banking licenses, while the central bank is also planning to strengthen regulation over FinTechs.