Trio steady Bank of Jinzhou

IFR 2295 3 August to 9 August 2019
4 min read
Asia
Daniel Stanton

Three strategic investors have agreed to take stakes in Bank of Jinzhou as the Chinese government seeks to save the country’s troubled lenders through market-based measures, with more policy easing on the way to ease stress in the financial sector.

Industrial and Commercial Bank of China and two state-owned asset management companies will take stakes in the bank, assuaging concerns that it would become the next lender to be taken over by the state after regulators took control of Baoshang Bank in May.

ICBC Financial Asset Investment, a subsidiary of ICBC, will take a 10.82% stake by injecting up to Rmb3bn (US$435.9m), while China Cinda Asset Management will take 6.49%, the companies said in separate announcements.

China Great Wall Asset Management said it would also invest in the bank, but it has yet to announce how much. People familiar with the matter said it is expected to take around a 3.69% stake.

The three new investors, by buying 21% of shares from existing investors, will become the largest shareholders of the Hong Kong-listed bank, which previously had a dispersed shareholder structure. The two AMCs are state-owned, while the Ministry of Finance and Central Huijin Investment, which is directly managed by sovereign wealth fund China Investment Corp, own a combined majority stake in ICBC.

A person who participated in the deal said the government did not want to appear to take the lead this time because regulators think investors in a Hong Kong-listed company may not want the bank to be controlled by Beijing, even though officials from the People’s Bank of China’s regional office in Liaoning will join the bank’s management team later.

“The most pressing challenge is its credit risks in the interbank market,” the person said. “Purchasing old shares, rather than issuing new shares, is the most efficient way to save it from credit worries.”

STILL CONCERNED

But onshore investors are still concerned about Bank of Jinzhou’s credit. Its certificates of deposit due to mature at par on August 5 were quoted at a cash price of 97.3, an unusually deep discount, according to Refinitiv data.

The bank’s US$1.496bn Additional Tier 1 bonds, callable in 2022, were bid at a cash price of 82, according to Refinitiv data. Its shares have been suspended since April 1, after it missed a deadline to publish its annual results.

“In the Bank of Jinzhou case, we see the government is trying to support the troubled bank and minimise the impact on the capital markets,” said David Yin, a vice-president at Moody’s.

The AMCs were established to deal with stressed assets in China’s financial system and could have bought Bank of Jinzhou’s bad loans directly, but Yin said they would have been sold at a steep discount, inflicting losses on the bank.

By becoming major shareholders, the three investors can help Bank of Jinzhou improve its internal risk controls, restructure debts, and make debt-to-equity swaps after they have had a look at the bank’s balance sheet, he said.

SPILLOVER EFFECT

An official with the National Development and Reform Commission, who drafted a guideline on debt-to-equity swaps published last week, said China has many regional banks similar to Bank of Jinzhou that have played a role in developing local economies and gained profits by building strong relationships with local companies.

“The failure of such banks will have significant spillover effects to regional economies and will cause risks to the financial system,” the official said..

“A viable way is to help banks go through their difficulties through market-based principles, rather than taking them over or letting them go bankrupt. Neither would be good to improve market confidence.”

The government will also ease some regulations to encourage more large banks with high-quality assets to participate in debt-to-equity swaps.