Banking | Analysts are downgrading small banks at record pace

Analysts are taking note of the struggles in China’s banking industry, which is being battered by an official deleveraging drive.

At least five smaller lenders have been downgraded by credit- rating companies this year, a record pace for the sector. Spikes in the volume of non-performing loans and an increase in loans overdue are among the reasons. One of the lenders – Guizhou-based Guiyang Rural Commercial Bank Co. – saw its bad debt balloon nearly tenfold in the space of two years, according to the assessor that slashed its rating.

China’s campaign to clean up its financial industry and crack down on a USD10 trillion shadow-banking system is a double whammy for smaller lenders: it’s pushing up the costs for them to seek funding from each other, and makes their investments in opaque asset-management plans less secure. Recent regulatory moves to widen the definition of non-performing loans also added to the strain, forcing some banks to report more bad debt and a reduction in their capital- adequacy ratios.

“Small and medium banks are the weakest link in the deleveraging process, because of a lack of deposits and their dependence on market funding,” said Grace Wu, head of China bank ratings at Fitch Ratings Ltd. in Hong Kong. “Because the lenders do a lot of business with non-bank financial institutions, their own risks can become contagious and affect the whole system.”

Other lenders that have been downgraded include Jilin Jiaohe Rural Commercial Bank Co., whose 3 billion yuan ($443 million) of investments in wealth management products were troubled by a default earlier this year. Shandong Zouping Rural Commercial Bank Co. saw a rating cut from Golden Credit Rating International Co. after its non-performing loans ratio surged to 9.3 percent last year from about 2 percent in 2016.

Guiyang Rural Commercial’s asset quality is improving, and it will deal with its bad loans in accordance with regulatory requirements, an official at the bank who asked not to be named said by phone last week.

Ratings companies have also cut their outlook for at least six smaller lenders to negative from stable since the start of 2017, citing reasons including deterioration of asset quality and weaker profitability, Industrial Economics Research & Consulting Co. analysts led by Xu Hanfei wrote in a recent research note.

Chinese policy makers made their latest move to crack down on shadow financing last Friday, with the government issuing draft rules to regulate banks’ issuance of wealth management products. Banking shares in Shanghai and Hong Kong rallied yesterday, led by Industrial & Commercial Bank of China Ltd., Hang Seng Bank Ltd., and BOC Hong Kong (Holdings) Ltd. Bloomberg