BREAKINGVIEWS-China hands banks poor stimulus consolation prize

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Robyn Mak

HONG KONG, Nov 11 (Reuters Breakingviews) - Executives at Chinese state-owned banks probably have one of the financial world's most thankless jobs. Beijing has loosened capital rules and pledged to inject new equity into its top six lenders to help them manage rising bad loans and falling earnings. But key details of the plan announced by officials in October are yet to be revealed and banks will keep suffering from the latest directives to lend.

Officials are planning to issue special bonds to "replenish" core Tier 1 capital at the country's largest state-backed banks - Industrial and Commercial Bank of China 601398.SS, 1398.HK, Agricultural Bank of China 601288.SS, 1288.HK, Bank of China 601988.SS, 3988.HK, China Construction Bank 601939.SS, 0939.HK, Bank of Communications 601328.SS, 3328.HK and Postal Savings Bank of China 601658.SS.

Supporting the group that has a combined $1 trillion market capitalisation is a critical part of Beijing's economic stimulus plan. So far, policymakers are focused on swapping hidden debt at local governments for official debt and allowing them to borrow more. Commercial banks already own 80% of provincial bonds.

While a 10 trillion yuan ($1.4 trillion) local debt package was unveiled on Friday, there were no fresh details on supporting the banks. Bloomberg earlier this year reported their recapitalisation could amount to 1 trillion yuan, about $140 billion, citing sources. All things being equal, that would increase their aggregate common equity Tier 1 ratio to 13%, up from this year's 12.1% forecast on Visible Alpha.

That doesn't add much to what seem relatively healthy capital buffers. New rules in January lowered the risk weightings for certain residential mortgages, credit cards and other assets, aligning them more with global standards. As of June, CET1 ratios at all but one of the six banks increased year-on-year; ICBC, the largest with $6.6 trillion of assets, had the greatest improvement, of 126 basis points.

What China's biggest banks really need is a reprieve from plunging earnings. Net interest margins are being squeezed by sluggish credit demand, and cuts to interest and mortgage rates, among other things. The six banks, which each count the central government as their largest shareholder, are also expected to maintain a dividend payout ratio of roughly 30%. Injecting 1 trillion yuan of capital would cover just the next two years of dividends for the group, per Visible Alpha forecasts.

That a recapitalisation will follow the local government debt swap signals lenders will keep doing a lot of heavy lifting for the world's second largest economy. The new capital rules halved the risk weighting for some local government bonds held by commercial banks to 10% and it is likely lenders will absorb the bulk of the new issuance. Banks are also under pressure to roll over existing loans to provinces at lower interest rates, which will further eat into profitability. Support may be on the way but the blows will keep coming too.

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CONTEXT NEWS

China's top legislative body approved a 10 trillion yuan package on Nov. 8 to ease local government debt. Key details of a broader stimulus plan outlined in October are yet to be revealed.

China last month pledged to increase the core Tier 1 capital at the country's six major banks as part of a broader stimulus package to revive growth in the economy. "Capital will be injected to different banks in turns and with different policies," Li Yunze, minister of the National Financial Regulatory Administration, said at the time.

Bloomberg News reported on Sept. 25 that the government was considering injecting up to 1 trillion yuan of capital into its biggest state banks. The funding will mainly come from issuing new special sovereign bonds, the report added.

(Editing by Antony Currie and Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on MAK/ robyn.mak@thomsonreuters.com))