Banking News

China’s biggest banks sink to record lows

(6 August 2019 – China) China's "big four" state-owned lenders, which together control more than US$14 trillion of assets, tumbled to record-low valuations on Monday (Aug 5) amid mounting concern that Beijing will encourage them to bail out smaller peers.

Industrial & Commercial Bank of China Ltd (ICBC), the world's largest lender by assets, lost US$11 billion of market value last week after injecting capital into a troubled regional bank as part of a government-orchestrated rescue.

Big Chinese lenders have long sacrificed profits in the name of national service, but that prospect has become increasingly worrying as pressure builds on their regional, city and rural peers.

Smaller Chinese banks tracked by UBS Group AG need an estimated US$349 billion of fresh capital - a sum they may struggle to raise without support from the likes of ICBC. For shareholders already skittish about the trade war, rising corporate defaults and slowing economic growth, it's yet another reason to sell.

While the four firms have dominated China's US$40 trillion banking system for decades, they've been joined in recent years by a growing number of smaller banks, many of which funded themselves with opaque asset management products and interbank borrowing, instead of more stable consumer deposits. These smaller banks are now getting squeezed as regulators clamp down on risky funding methods and China's economic slowdown causes bad loans to increase.

Their plight has been a major focus of investors since May, when Beijing surprised markets by seizing control of Baoshang Bank Co in the first government takeover of a Chinese lender in two decades. That was followed two months later by a capital injection into Bank of Jinzhou Co by ICBC and two other state-owned financial firms.

Analysts predict that more of China's roughly 4,000 small lenders will run into trouble and that bigger banks will be asked to play a role in shoring them up. While regulators could in theory allow distressed lenders to fail, that outcome is seen as unlikely because of Beijing's focus on maintaining financial stability. When the authorities imposed losses on a small number of Baoshang Bank's creditors, it triggered a mini-panic in interbank funding markets that only subsided after big cash injections from the central bank.