HEARD ON THE STREET
DECEMBER 18, 2009, 5:12 A.M. ET.
Tidying Up After China's Lending Binge .
By ANDREW PEAPLE
Groaning under the weight of a massive surge in bank lending this year, China's banks are trying to find ways to get some of those loans off their books.
Selling loans to trust companies has become a favored tactic, with the trust companies then repackaging the loans and selling them to clients. It's a murky area, with data hard to come by - but the activity is on the increase. One research company estimates that loans worth more than $23 billion were sold on in November, equivalent to more than half of new loans made by Chinese banks that month.
Some might say there's nothing wrong with that - after all, securitization has become common practice for global banks. But in China there's minimal regulation in this area, something that has proved dangerous in other countries. And this leads to an accounting issue because Chinese banks are shifting the loans off their balance sheets to help improve their capital standing even though they could still bear the risk associated with those loans - especially if, as is often the case, the banks have promised to repurchase the loans at a later date.
It's unclear what the China Banking Regulatory Commission intends to do about the issue of potential balance sheet under-reporting. But worries like this could explain recent talk that the CBRC wants to raise capital adequacy ratios for China's banks.
That might seem over-cautious as Chinese banks' capital adequacy ratios appear pretty robust on paper. Of the major listed banks, Bank of China had the lowest headline ratio as of end-September, at 11.63%, with others seeing ratios above 12%. That's reasonably high by international standards, but in each case the ratio is down since the start of the year.
Chinese banks are increasingly embracing securitization, selling loans to trust companies in deals that make their balance sheets hard to read. Heard on the Street's Andrew Peaple discusses whether the country is wandering down a dangerous path.
Besides questions about below-the-radar loan selling, there are other potential gremlins for the banks that justify enforcing more prudent capital levels.
For example, it's not clear whether the amount that banks disclose as non-performing loans captures the full extent of bad debt on their books. The CBRC also has been worried this year about the banks' high reliance on subordinated debt as part of their core capital, in part because of the systemic risk this represents - about 50% of such debt in issue is held by other Chinese banks.
Add these potential pitfalls and it's possible to see why the CBRC might be concerned about bank capital levels behind the strong-looking headline figures. That's even before factoring in an expected rise in bad debts over the medium term, as some loans made during this year's lending binge go bad. It's been quite a party for the banks in China this year. For those cleaning up afterward, the headaches are growing.
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