Mainland banks face rough ride

Chinese banks are expected to face headwinds when seeking to raise funds next year as profit-conscious investors cling to the sidelines, expecting a wave of bad loans to hammer the sector and erode already slimming margins.

The sector is ending its worst annual performance in years after putting aside record provisions due to Covid-19, and Beijing has urged banks to sacrifice profits to help the economy.

Next year as lenders end pandemic-related loan forbearance - which means borrowers can suspend repayments or pay less in interest - banks must bolster their capital against loans previously not classified as nonperforming.

Big and medium-sized banks also need to improve their capital adequacy as demanded by global and domestic watchdogs.

China's banks raised 1.2 trillion yuan (HK$1.42 trillion) in the first 11 months of the year - off the pace of 1.5 trillion yuan for all of 2019, data from Fitch Ratings shows.

The 26 listed banks may need to replenish at least 1.25 trillion yuan of capital in 2021, Shenzhen-based brokerage Guosheng Securities estimates.

"The pressure of capital raising for the whole banking industry is still pretty big," said Vivian Xue, Fitch's director of Asia-Pacific financial institutions. "China's largest banks will need to raise substantial capital or loss-absorbing debt over the next few years."

The four largest - Industrial and Commercial Bank, Construction Bank, Agricultural Bank and Bank of China - face a shortfall in this loss-absorbing debt of 4.7 trillion yuan by the end of 2024 to meet requirements set by the Basel-based Financial Stability Board.

In the scenario, Fitch assumes risk-weighted assets including loans will grow 8 percent annually.

Mainland banking shares have fallen 6.5 percent this year, even as China's broader market surged 22 percent.

REUTERS