On March 31, the Chinese government announced that it is pledging RMB520 billion ($44.8 billion) of capital injections on common equity tier 1 (CET1) capital into the Bank of Communications (BoCom), Bank of China (BoC), Postal Savings Bank of China (PSBC) and China Construction Bank (CCB).
Altogether, China has six SOE banks. The other two SOE banks are the Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China (ABC).
This capital injection will be achieved through private placements of A shares, with the Ministry of Finance being a major investor in all four banks (see tables). The government is expected to use special sovereign bonds to fund the injections. According to Chinese media reports, the Ministry of Finance will either take up the majority or all of the shares to be placed.
The shares will be sold at a premium, with the specific percentage varying between banks, ranging from 8.8% to 21.5% above their March 28 closing levels.
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The capital injection aims to strengthen the banks’ capital buffers, improve their financial health, and bolster the banks’ ability to withstand risks and shocks.
By strengthening the banks, the government hopes to enable them to better support lending to the industrial and real economy sectors.
A JP Morgan report says: “The capital injection for the SOE banks was well-flagged during the government press conference in September 2024. The aggregate balance of new equities raised by the four banks is RMB520 billion, which is close to the RMB500 billion of special government bond issuance announced in the government work report in March.”
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JP Morgan estimates that BOC, CCB, BoCom and PSBC will raise new equities by RMB165 billion, RMB105 billion, RMB120 billion and RMB130 billion, respectively, with new equity equivalent to 9%, 5%, 19% and 21% of existing shares, respectively. New shareholders include the Ministry of Finance and other SOE companies.
The placements will be accretive to CET1 ratios, which will increase by 78 basis points (bps), 43 bps, 117 bps and 138 bps for BOC, CCB, BoCom and PSBC, JP Morgan calculates.
Post equity fundraising, their respective capital buffers (CET1 ratio minus minimum requirement) will be 397 bps, 591 bps, 291 bps and 295 bps for BOC, CCB, BoCom and PSBC. “CCB has the highest capital ratio prior and post the event; and we believe close to 300bps of capital buffer is sufficient to support growth for PSBC,” JP Morgan says.
Fitch upgrades Chinese banks to stable from negative
On April 8, Fitch Ratings upgraded BOC, CCB, BoCom, PSBC, ICBC (five SOE banks) and China Merchants Bank to stable from negative to reflect strong government support. “China’s propensity to support the financial system is one of the highest globally, in our view. All of them are global systemically important banks (G-SIB) and domestic systemically important banks (D-SIB) in China,” Fitch says.
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Fitch adds that the larger their responsibilities in supporting government initiatives to bolster the economy and the greater their interconnectivity within and beyond the financial system, the more likely any default by a state bank would reverberate to other parts of the economy, hence greater policy support for these banks.
“They have expanding roles in supporting economic growth, an increasingly important role in funding SOEs, and deeper involvement in initiatives to support vulnerable sectors, including local government financing vehicles (LGFV), property developers, and small enterprises,” says Fitch.
China’s state banks provide nearly half of SOE and LGFV loans. The greater their responsibilities in supporting government initiatives and the greater their interconnectivity within and beyond the financial system, the more likely a state bank’s default would create significant vulnerability in other parts of the economy and increase the overall cost of restoring financial stability.
The March 31 announcements for CET1 injections for the state banks underscore that the central government may increasingly rely on them to carry out its policies.
Financial sector stability is frequently quoted as a state priority and the Chinese government has often reiterated the importance of state banks in supporting China’s economic transition and regulatory reform.
“We believe the state banks are adequately placed to support the government’s agenda of reinvigorating the broader economy without materially sacrificing their own financial stability or commercial sustainability. This is because a large portion of state banks’ policy lending is related to Chinese SOEs, which dominate large segments of the domestic economy and remain important in carrying out the state’s strategic mandates. Their creditworthiness often carries implicit government guarantees, a strong probability of government support, and very low default rates,” Fitch elaborates.
Sufficient capital to absorb non-performing assets
According to Fitch, the problematic assets were 16% of system credit as at end-2024, similar to the levels at end-2015 and end-2019.
“This [capital raising] could ease future impairment risks and lower the size of a system recapitalisation. The current credit efficiency ratio can also support stable system leverage of below 280% of GDP,” Fitch adds. The ratio has to be at least 0.4 to avoid adding to the stock of inefficient credit.
The capital injection should also help sustain state banks’ loss-absorbing buffers as their profitability weakens. Their average common equity Tier 1 (CET1) ratio was 12.5% at end-3Q2024. “Our analysis shows every RMB1 trillion (in aggregate) of capital injected into the six state banks could lift their average CET1 ratio by 1 ppt, assuming no increase in risk-weighted assets,” Fitch says.
“We expect moderate credit growth and no aggressive increase in their risk appetite after the injection, considering current total loss-absorbing capacity requirements and refinancing needs,” Fitch adds.
Chinese stimulus
In the great global rebalancing, Chinese consumption has to play a much larger role in driving global growth.
In the stimulus package announced in September last year, the People’s Bank of China (PBOC), the Financial Regulatory Bureau and the China Securities Regulatory Commission (CSRC) introduced several significant policies aimed at stimulating the economy.
These included a series of interest rate cuts. The Open Market Operation rate, a policy rate that affects short-term borrowing, was reduced by 20 bps, more than double what many had expected. The one-year Medium-term Lending Facility (MLF) rate, which is the interest rate the PBOC charges commercial banks for medium-term loans, was cut by 30 bps.
To help homeowners, the rate on outstanding mortgages was reduced by 50 bps to equal the rates that apply to new mortgages. The Loan Prime Rate, the benchmark lending rate, was also lowered by 20 bps to 25 bps to reduce borrowing costs for businesses and individuals.
Banks’ reserve requirements (RRR or reserve requirement ratio) were lowered to help release more funds into the banking system. The interest rate paid by banks on deposits was also reduced to help banks maintain stable net interest margins (NIM).
In addition, the PBOC announced it will provide direct funding to support the buying of shares and to add liquidity to the market. Through a new swap facility, eligible financial institutions are allowed to use any bonds, stock ETFs, or stocks in the CSI 300 Index that they own as collateral to obtain highly liquid assets such as government bonds or central bank bills from the PBOC.
A second facility focused on re-lending is designed to help commercial banks provide loans to companies who would like to buy back shares and to major shareholders who want to buy more shares of companies they own. In total, the PBOC committed RMB800 billion to these measures.
Analysts generally positive
JP Morgan expects a positive impact for BOC because of the 41% premium of new shares over the H-share price. For PSBC, the new capital raise and dilution are higher than expected, JP Morgan adds.
In a report dated April 14, OCBC Investment Research says it expects China’s banking sector to remain resilient. Potential earnings pressure from softer loan growth, weaker transactional banking fees, asset quality concerns and NIM compression could be offset by a high provision coverage ratio, investment disposals, adequate capital buffers, low valuations and decent dividend yields of over 6% for the big-four SOE banks’ H-shares.
The MSCI China Banks Index is trading at a 12-month forward P/B multiple of 0.47 times, which is 0.7 standard deviations below the index’s 10-year average of 0.57 times. During the 2018 trade war, the MSCI China Banks Index traded at an average P/B multiple of 0.68 times from 2018 to 2019 and within a range of 0.56 times to 0.91 times, OCBC points out.
“In this regard, we like selected SOE banks with solid capital positions which would have less dilution from recapitalisation. Our preferred picks are China Construction Bank [Fair value: HK$8.00] and Industrial and Commercial Bank of China [Fair value: HK$6.80],” OCBC says. CCB closed at HK$6.63 and ICBC at HK$5.32 ($1.12) on April 15.
