China plans to add capital at big banks for first time in a decade

China is planning to recapitalize its biggest commercial lenders for the first time in more than a decade, in a bid to strengthen the industry battling with record low margins, sinking profits and rising bad debt.
 

At a rare press conference on Tuesday, authorities flagged they will increase the core tier 1 capital at its six major commercial banks, along with a slew of other measures to shore up the real estate market and the economy.  

“Capital will be injected to different banks in turns and with different policies,” said Li Yunze, minister of the National Financial Regulatory Administration, without giving more details. The regulator will urge big banks to enhance capital management capabilities and strengthen operations to better serve as a driving force for the real economy, he said. 

Authorities on Tuesday announced a major stimulus push to shore up growth. The plan included a broad-based cut to existing mortgage rates, adding to pressure on banks by lowering annual interest expenses by about 150 billion yuan ($21 billion). Regulators also reduced how much banks need to hold in reserves and a cut to the key policy rate. 

Li said that it has become necessary to add capital through various internal and external channels. It would be the first time since 2008 that authorities have injected capital into one of its big banks and the first time since they all became public companies.  

“It’s unclear how the state-owned shareholders, including the Ministry of Finance, will increase their stakes in the large banks,” said Liao Zhiming, an analyst at Huayuan Securities Co. “Still, the plan shows regulators are urgently sending positive signals to support the banking industry by stabilizing its main force — the big banks — in serving the real economy which is under increasing pressure with significant margin declines and ensuring the prevention of systemic risk.” 

Large commercial banks, Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd., have primarily relied on retained profits to increase capital. However, as they have continued to reduce fees and offer loan concessions, net interest margins have slid to record lows and profit growth has slowed. 

The core tier 1 capital adequacy ratio of the six major state-owned banks has fallen slightly, but remains at an overall high level. On average, the ratio was 11.77 per cent at the end of June, above the 8.5 per cent level required for China’s systemically important banks.

The other big lenders include China Construction Bank Corp., Bank of Communications Co., Bank of China Ltd. and Postal Savings Bank of China Co.

ICBC gained 5.2 per cent and Bank of China rose 4.2 per cent in Hong Kong as of 1:22 pm.    

People’s Bank of China Governor Pan Gongsheng said at the press conference that the new round of interest rate adjustments will have a neutral impact on bank profits and margins, given that more funding is freed up and deposit rates will follow suit.

Banks have resorted to multiple deposit rate cuts to mitigate the impact of lower loan rates. Combined profits at China’s commercial lenders rose 0.4 per cent in the first half, the slowest pace since 2020, according to official data. 

The sector’s net interest margins have continued to decline, hitting a record low of 1.54 per cent at the end of June, well below the 1.8 per cent threshold regarded as necessary to maintain reasonable profitability.