A clerk counting stacks of 100 yuan notes at a bank on the mainland. Moves by the central government to hike the reserve requirement ratio have constrained banks' ability to lend. AFP Photo

Tightened capital requirements mean banks have to raise more funds

Mainland banks, including those listed in Hong Kong, are facing increasingly heavy fundraising pressure in order to meet tightened capital requirements, according to a survey released Monday by accounting firm PricewaterhouseCoopers (PwC) and the Chinese Banking Association.

The recent spade of quarterly earnings announcements by the big mainland banks show that deposit growth at most of them moderated or declined in the third quarter, pointing to the increasing pressure on banks to shore up their deposit bases.

"Increased competition to attract deposits" was cited as the critical challenge faced by Chinese banks as they struggle to meet the tougher capital requirements, according to the survey of 890 banking executives from June to August by PwC and the China Banking Association.

Moves by the central government to hike the reserve requirement ratio several times this year as it fights inflation have constrained banks' ability to lend and has meanwhile added to the pressure on lenders to beef up their capital positions.

While commercial banks nationwide are asked to keep their loan-to-deposit ratio no higher than 75 percent, the country's biggest lenders now have to put a historic high of 21.5 percent of their deposits into their reserves.

These stricter capital rules have led to intensifying competition in the deposit market, said Raymond Yung, PwC financial services leader for China.

"Enhanced asset liability management and maintaining a stable funding platform is now a top focus for Chinese banks," Yung told reporters on Monday.

Nearly nine in ten of the bankers surveyed said they will provide structured deposit and wealth management products to attract more deposits.

"Chinese banks are exploring alternative sources of funding including accessing capital markets, asset securitization, and offering structured deposit products," added Yung.

The capital markets remained the preferred fundraising channel, with 46.8 percent of the bankers voting for "financing by issuing subordinated bonds" and 45.8 percent for financing through share sales.

The focus for Chinese banks, said Charles Chow, financial services partner at PwC China, is moving away from pursuing asset growth to bettering asset quality and credit efficiency.

As fears grow over soured property loans, banks are treading cautiously as they lend to real estate projects. More than 60 percent of the bankers expressed their intention to scale down real estate-related lending.

Despite rising credit risk concerns due to significant exposure to real estate-related lending and local government financing vehicle loans, the majority of bank respondents expect their non-performing loan (NPL) ratios to stabilize at the current level in the next three years. Ninety percent of the bankers surveyed believe the NPL ratio will remain below 5 percent during the next three years.

emmaan@chinadailyhk.com

China Daily

(HK Edition 11/01/2011 page2)