Amid Big Profits, Banks In China Show Strains-华尔街日报

China’s big banks reported hefty profits in the first half of this year, but signs of strain are showing from their massive lending binges and as they struggle to meet tougher capital requirements.

Profits of the nation’s five biggest banks by assets, led by Industrial & Commercial Bank of China Ltd., were buoyed in part by a greater focus on business that generates fee income, such as credit cards and wealth-management products.

Chinese banks are increasingly looking to pump up their capital base, mostly by selling debt, in the face of a push to raise regulatory requirements. At the same time, they face increased concerns about potentially problematic loans tied to real estate and government projects. Some Chinese lenders recently acknowledged a bigger exposure to local-government debt used for infrastructure projects than they previously disclosed.

Some banks also have significantly beefed up their provisions against loan losses. Bank of China Ltd., for example, has set aside more money for bad loans after just six months than it did for all of 2010. Such moves eat into capital. ICBC, which reported results on Thursday, also set aside more funds for loan losses.

Investors are particularly concerned about bank loans to local governments to build highways and other infrastructure projects, estimated to be as much as 14.38 trillion yuan ($2.25 trillion), or a third of all outstanding loans in the country as of the end of last year. Big state-owned banks gave many of those loans and often accepted land as collateral.

However, many analysts don’t expect China to suffer a banking crisis as was seen in the U.S. and Europe, largely thanks to its still-robust─albeit slowing─economic growth. Zhu Chaoping, head of research at ChinaScope Financial, estimates that China’s economic growth will weaken from 10.3% last year to 9.4% this year and 9% in 2011. ‘This growth rate will provide support to the banking industry,’ he said.

To cope with the two-pronged capital squeeze, China’s publicly traded banks already have raised 594.7 billion yuan ($93 billion) from the sale of stocks and bonds since July 1, 2010, according to ChinaScope, a market-research firm in Hong Kong. More fund-raising plans are in the offing.

China Construction Bank Corp., for instance, said it plans to raise 80 billion yuan through a debt offering. Its chairman, Guo Shuqing, said the bank expects to sell much of that debt in Hong Kong to take advantage of the low funding costs enabled by rising demand for yuan-linked assets offshore.
Executives at both Bank of China and Bank of Communications stressed that they have no equity-financing plans in the near term, which analysts attributed to their worry about any potential pressure that a share sale could have on their already depressed stock prices.
Thursday, ICBC Chairman Jiang Jianqing said his bank can issue 100 billion yuan worth of debt in the future to replenish capital. Mr. Jiang said the bank sees such debt issuance as a ‘cost effective’ way to boost its capital base, but added that the actual size of any debt offering will depend on the bank’s future capital needs.
To meet the new capital requirements, large Chinese banks that are considered ‘systemically important,’ or too big to fail, will need to raise up to 500 billion yuan in additional capital in the next five years, Wu Xiaoling, a former deputy governor at the People’s Bank of China, said at a bankers forum in Beijing on Saturday.

via Amid Big Profits, Banks In China Show Strains-华尔街日报.

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