Small Chinese Banks Get Green Light to Sell Bad Debt With Private Share Offering
Tang Shihua
DATE:  Jan 19 2021
/ SOURCE:  Yicai
Small Chinese Banks Get Green Light to Sell Bad Debt With Private Share Offering Small Chinese Banks Get Green Light to Sell Bad Debt With Private Share Offering

(Yicai Global) Jan. 19 -- Three Chinese rural commercial banks have been given permission by the country’s regulator to tie a private placement of shares with the sale of some of the banks’ non-performing assets.

The private placement plans of four banks Anhui Shucheng Rural Commercial Bank, Jiangxi Luxi Rural Commercial Bank, Shanxi Yangcheng Rural Commercial Bank and Zhangjiakou Rural Commercial Bank, together worth CNY1.1 billion (USD170 million), have been approved, the China Securities Regulatory Commission said on its website.

In three of these cases, in return for a good price for their equity, the lenders are asking investors to also subscribe to some of their bad debts. Anhui Shucheng Rural Bank is requiring investors to purchase its non-performing assets at CNY0.8 (USD0.12) per share and Zhangjiakou Rural Bank at CNY0.85 per share.

This practice has increased in recent years. In 2018, there were four such cases of banks offering non-performing assets with a private placement, and 11 in 2019, according to incomplete statistics. It helps banks to replenish capital, deal with their bad debts and meet regulatory requirements for liquidity.

"However, there is the danger that this type of transaction creates a kind of moral hazard,” Xiang Zhenwei, senior vice president of US credit rating agency Moody’s financial institution department, told Yicai Global. Although the selling of its non-performing assets helps to improve the lender’s credit standing, it makes transactions more opaque and many of the banks’ shares are held by local government entities, he added.

Private placements have always been an effective way for small regional banks to raise funds, Xiang said. These banks have fewer resources to support their core tier-one capital adequacy ratio, and it is difficult for them to meet the conditions needed in order to go public, he said.

Such banks tend to extend a lot of loans, but they have low profitability, putting them under greater capital pressure than large banks, he added.

Rural commercial banks are some of the main lenders to micro and small companies, a senior banking executive told Yicai Global. The government has been encouraging the increase in lending to such businesses since the outbreak of the Covid-19 pandemic. A private placement is a way for the government to participate in the restructuring of these banks to help boost the local real economy.

The Bank of Gansu got the go-ahead for a private placement earlier this month. And there are six other applications from small regional commercial banks under review, all of which include plans to tie their private share sale with their non-performing assets.

Editors: Tang Shihua, Kim Taylor

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Keywords:   Financing,Private Placement,Non-performing Loans,Non-performing Assets,Regional Banks,Industry Analysis,Regulatory Approva,CSRC