Tag Archives: asset quality

China’s Big Banks’ Wealth Management Products Raise Concerns

An often overlooked red flag about the creditworthiness of China’s big state-owned banks was raised by Fitch Ratings on Monday. In a report reaffirming the ratings of the Industrial & Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China and Bank of Communications, the U.S. credit rating agency noted:

One key risk over the short-term is Chinese banks’ rapidly growing wealth management offerings, of which state banks are the leading issuers. At end-Q1 12, Fitch estimates that the amount of outstanding wealth management products in the banking system reached 10.4 trillion yuan ($1.6 trillion). While this represents a relatively low 12% of total deposits, an estimated half of all new deposits are raised through these products. Poor matching of the maturities of the liabilities with the assets underlying the products means banks often do not have money coming in on the products to repay investors upon maturity. Instead, banks often rely on new issuance or product rollovers to repay investors.

This is a different concern to the more common one about the quality of the banks’ loan books in the wake of the credit-fueled stimulus splurge that followed the 2008 global financial crisis which saw the banks’s credit exposure growing twice as fast as nominal GDP in the three years to the end of last year. That widening gap raises questions about borrowers’ ability to repay as these loans fall due this year and next, especially as the economy slows. We are already seeing the big banks showing great forbearance, especially to local government borrowers, and dutifully finding ways to keep those pressures on asset quality from showing up in higher non-performing loans numbers.

The expansion of wealth management products threatens the big banks less with solvency issues and more with funding and liquidity ones, given how important this activity has become to deposit growth. True, as Fitch acknowledges, the banks’ state backing, strong deposit networks and 19% capital reserve ratios provide “substantial resources” to absorb increasing funding or liquidity strains were there to be a disruption to the wealth management business. And if the worst came to pass, Beijing would likely shore up the balance sheets of  failing institutions, as it has shown itself willing to do in the past. But it could be bumpy. What happened in the informal banking sector in Wenzhou provides a microcosmic reminder of what can go wrong when a slowing economy can’t keep up with the race for yield.

It is worth remembering that four China’s five biggest state-owned banks rank among the six largest banks in the world. Just as their sheer size means credit losses could be significant, so the volume of the wealth management business means a disruption of it could put pressure on China’s sovereign credit rating should Beijing have to provide material support.

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