Warning signs are flashing all over China’s banking sector.
Chinese regulators have seized or bailed out lenders at an unprecedented pace amid a surge in bad debt, while forcing banks to step up lending at increasingly lower interest spreads. That keeps banks in business, but it’s not a recipe for future longevity.
Increasing worries about the health of China’s financial system have hit investor confidence in banks and hurt recent capital raising efforts as well.
The state bailout of Inner Mongolia regional lender Baoshang Bank earlier this year sparked a string of small bank bailouts, including Hengfeng Bank Co. and Bank of Jinzhou.
Yingkou had to sweeten financial incentives to entice its customers to stay. “To help repair the damage, Yingkou hiked its already high deposit interest rates,” Reuters reported.
Several Bank Runs in 2019
Yingkou’s crisis couldn’t have come at a worse time.Small banks have become more dependent on deposit customers after Baoshang’s shocking bailout earlier this year sent interbank interest rates soaring. That means short-term funding for small banks became too expensive, and banks had to increasingly rely on customer deposits for funding.
When Baoshang Bank was taken over by Beijing regulators in May, it was the first state bailout of a financial institution in more than 20 years.
The financial health at small Chinese banks is increasingly worrisome. Armed with a more limited suite of products than their biggest counterparts, small banks have had to make do by jacking up interest rates offered to attract depositors. But while such measures can stop bank runs, they squeeze the bank’s rate spread and hurt profitability, and put the bank in even weaker financial position in the future.
Souring loans pose another dark cloud over small banks. China Banking and Insurance Regulatory Commission’s second-quarter 2019 statistics reported that total nonperforming loans (NPL)—bank loans that are behind in payment—were 2.24 trillion yuan ($319 billion). The NPL ratio at banks was 1.81 percent, an increase of 0.01 percent from the prior quarter. China’s real NPL figures, according to most experts, are likely orders of magnitude higher than the official metrics.
Postal Savings Bank Listing Disappoints
Meanwhile, in Shanghai, China’s biggest bank IPO since 2010 drew the lowest retail investor demand in years. The share sale of Postal Savings Bank of China Co. earlier this month saw unusually low demand, possibly due to broader jitters over China’s troubled banking system.On the surface, the Postal Savings Bank’s 33 billion yuan ($4.6 billion) IPO was 79 times oversubscribed from retail investors, according to a Caixin report that cited securities filings.
That figure sounds like a ton of demand. But the reality is that demand for Postal Savings Bank shares was the lowest for a domestic stock listing since China National Nuclear Power Co.’s IPO in 2015, which occurred right before the 2015 Chinese stock market crash.
Typically, IPOs in China are usually hundreds of times oversubscribed due to investor demand and expectation of an early windfall. The muted response for Postal Savings Bank is a vote of no-confidence on China’s banking sector and increasing worries over mainland stock valuations.