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Chinese Bank Shows How To Move Risks Around
As Chinese banks’ funding and profitability increasingly comes from less secure places, investors should tread carefully
By ANJANI TRIVEDI
Aug. 19, 2016 4:43 a.m. ET
1 COMMENTS
Here’s a case study of how banking regulations in China can end up pushing one risk under the rug and cause another to pop up elsewhere.
China Merchants Bank is a midtier Chinese bank that has generated concern among investors for its off-balance sheet exposures. In its latest results, it reported investment receivables, a line item for stashing away wealth-management products and asset-management plans at third-party institutions, had fallen 22% in the first half of this year.
At first glance, the drop in such balance-sheet maneuvers seems like a good thing and potentially a sign that regulators trying to break the dodgy boughs of China’s sprawling banking system are being effective. Across China’s larger banks, the investment receivables category grew at least fourfold over the past three years. But now, the drop is actually leading to larger issues for China Merchants.
Loan growth last quarter shot up by 19%, after averaging approximately 12% over the last two years. Meanwhile deposits contracted by nearly 4%, after growing on average 12%. For one, if loan growth continues to rise at this speed it will create further pressure on the bank’s capital buffer, especially as profitability slows. The loans are likely rising so quickly because new rules are forcing banks to bring back loans that were embedded in off-balance sheet wealth-management products and trust-beneficiary rights, on to their balance sheets. So, nonperforming loans also rose sharply—by almost 40% on the year.
More importantly, the gap between fast-growing loans and slowing deposits has created a funding shortfall. One way to close that gap is by issuing longer-tenor bonds, but that is far more expensive than short-term debt. And China Merchants Bank’s debt has nearly doubled in the past year as deposits slow. This is where things start to look murky: China Merchants Bank’s off-balance sheet, non-principal guaranteed wealth-management products seem to have raised short-term funding via its wealth-management product entities. This was up 14-fold since December. Meanwhile, short-term wealth-management products rose 33%. And fees and commissions from these off-balance sheet entities grew 135%. This parallel operation that raised the ire of regulators in the first place continues to grow.
As banks’ funding and profitability increasingly comes from less secure places, investors should tread carefully.
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