In a significant move to address mounting financial pressures, China has announced plans to recapitalize its largest commercial banks for the first time in over a decade.
The initiative is aimed at bolstering a banking sector struggling with record-low margins, shrinking profits, and growing bad debt.
During a rare press conference on Tuesday, Chinese financial regulators outlined a series of measures to support the country’s six major commercial banks, including increasing their core tier 1 capital.
This marks the first capital injection into these banks since they became public companies, and the first recapitalization by authorities since the 2008 financial crisis.
Core capital boost for six major banks
Li Yunze, Minister of the National Financial Regulatory Administration, announced the recapitalization plans, stating that capital will be injected into different banks at different times, though further details were not provided.
The goal, according to Li, is to enhance capital management capabilities and strengthen the banks’ operations so they can better support China’s real economy.
“The recapitalization process will involve a combination of internal and external capital-raising channels,” Li said.
The move comes as part of a broader strategy to ensure the stability of China’s banking sector, which plays a critical role in managing economic risk and driving growth.
Among the six banks targeted for recapitalization are the Industrial & Commercial Bank of China Ltd. (ICBC), Agricultural Bank of China Ltd., China Construction Bank Corp., Bank of Communications Co., Bank of China Ltd., and Postal Savings Bank of China Co.
These state-owned commercial lenders have traditionally relied on retained profits to bolster their capital bases, but declining margins and fee reductions have increasingly put pressure on their balance sheets.
Declining margins and profitability prompt action
The recapitalization comes at a time when the profitability of China’s commercial banking sector is under significant strain.
Combined profits at the country’s commercial lenders increased by just 0.4% in the first half of 2023, marking the slowest growth since 2020.
This slow growth has been exacerbated by sliding net interest margins, which dropped to a record low of 1.54% by the end of June—well below the 1.8% threshold considered necessary for maintaining sustainable profitability.
The six major banks’ core tier 1 capital adequacy ratio, a critical measure of financial stability, averaged 11.77% at the end of June.
While this figure remains above the 8.5% minimum requirement for China’s systemically important banks, it has edged downward, prompting concerns that further declines could endanger the stability of the broader financial system.
Li Yunze’s comments echoed these concerns, noting that without additional capital, the banks could struggle to continue offering the same level of support to China’s economy.
The recapitalization plan is intended to mitigate these risks by ensuring the banks have sufficient capital to absorb losses and support lending activities.
Broad economic measures to support recovery
The recapitalization announcement was part of a broader stimulus package unveiled by Chinese authorities aimed at stabilizing the real estate market and boosting economic growth.
Among the key measures was a broad-based cut to existing mortgage rates, a move expected to lower annual interest expenses by approximately 150 billion yuan ($21 billion).
However, the mortgage rate cut also adds pressure on the banks by reducing their income from loans.
To counterbalance the impact of the mortgage rate cuts, regulators also announced reductions in the amount of reserves banks are required to hold, as well as a cut to the key policy rate.
These adjustments are expected to free up additional capital for lending, helping to offset some of the revenue lost due to lower mortgage rates.
People’s Bank of China Governor Pan Gongsheng addressed concerns about the effect of the interest rate adjustments on bank profitability, stating that the changes would have a neutral impact.
The freeing up of additional funding and the alignment of deposit rates will offset the effect of lower loan rates, preventing significant harm to bank profits and margins.
Banks look to recover amid tough conditions
Despite the challenges, some of China’s major banks saw a positive reaction in the stock market following the recapitalization announcement.
Shares of ICBC, the largest of China’s commercial banks, rose by 5.2% in Hong Kong, while Bank of China saw its stock climb by 4.2%.
Analysts suggest that the recapitalization signals a clear intent from Chinese regulators to stabilize the banking sector and send a positive message to the market.
“This recapitalization plan shows that regulators are taking decisive action to address the pressures facing the banks and ensure they remain a reliable force in serving the real economy,” said Liao Zhiming, an analyst at Huayuan Securities Co.
However, challenges remain. In addition to declining margins, China’s banks are contending with a rising volume of non-performing loans (NPLs), particularly in the struggling real estate sector.
The financial health of many developers has deteriorated in recent years, leading to a surge in bad debt.
This has forced banks to take on increasing provisions for loan losses, further cutting into profits.
Recapitalization process could take several years
As China’s commercial banks prepare for a recapitalization process that could play out over several years, the sector remains under significant pressure.
The combination of declining profitability, rising bad debt, and economic uncertainty is likely to keep China’s banks on a cautious path as they navigate an increasingly challenging financial landscape.
At the same time, the recapitalization plan underscores the central role that China’s state-owned commercial banks play in the country’s economy.
By injecting fresh capital into these institutions, regulators are signaling their commitment to maintaining stability in the financial system, even as broader economic risks continue to mount.
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