Reform, restructuring ahead for China's local banks: ANZ

2020 will be a year of reform and restructuring for Chinese local banks in the battle against financial risk, a new study from ANZ Bank anticipates.

Authorities will likely introduce a slew of reforms this year, which is the final year of a three-year campaign against financial instability. The measures will include cleaning up unqualified shareholders and centralizing custody of shares, allowing multiple channels of capital supplement and making market-oriented restructuring.

China’s local commercial banks are very diversified in terms of size, location and business scope. Troubled lenders were estimated to account for no more than 2 percent of total banking assets, so overall credit risk for the industry remains manageable, said Xing Zhaopeng, a China markets economist at ANZ.

With less than 2 trillion yuan (US$281 billion) of total assets, most local banks have no nominal controllers. Even the largest owner usually holds no more than 10 percent of shares. This has given some private agglomerates the chance to control local banks for highly risky financing via entrustment agreements or variable interest entities.

Authorities have made efforts to improve the corporate governance of local banks. The China Banking and Insurance Regulatory Commission claimed that over 1,400 unqualified shareholders were "cleaned up" in 2019. Some problematic institutions were restructured by larger state-owned banks and local governments.

The overall capital adequacy ratios (CAR) of local banks are still well above 12 percent, much higher than Basel-III requirements. But individual risks are still significant, as the CAR and core tier-1 CAR of some banks are below the minimal regulatory requirement, according to the study.

The COVID-19 outbreak will weigh on the profit outlook and the asset quality of local banks, which are vulnerable due to a lack of business and client diversity. However, the pandemic is unlikely to trigger a systemic risk event and credit risk will remain manageable, according to ANZ. 

ANZ expects authorities to provide a longer grace period for loan repayments and finally a write-off for bad debts, which will buy time for banks to handle problematic assets.