Banks hit by sharp drop in shares

By Wang Jiamei Source:Global Times Published: 2013-3-28 23:38:01

China's bank shares took a heavy hit Thursday after the country's banking regulator tightened its grip on the risky assets of some wealth management products (WMPs).

Small and medium-sized banks saw the heaviest losses Thursday. Shares in Industrial Bank Co slumped by the 10 percent daily limit to close at 17.87 yuan ($2.88), while Ping An Bank Co plunged by 9.62 percent to finish at 20.02 yuan. Shares in China Citic Bank Corp plummeted by 9.11 percent to 4.79 yuan.

The regulatory crackdown on financial products sold at banks struck a direct blow to the country's commercial lenders, analysts said.

In a circular posted on its official website Wednesday, the China Banking Regulatory Commission (CBRC) criticized some banks for avoiding loan restrictions and failing to isolate risks promptly when investing capital raised from WMP sales in non-standard debt assets, such as trust loans, acceptance bills, letters of credit, accounts receivable and equity-backed financing.

In order to reduce potential risks, commercial banks should distinguish WMPs from their underlying assets by setting up separate accounting books for the products, the banking watchdog stipulated.

And in order to improve transparency, banks were ordered to fully disclose information about investment in non-standard debt assets and inform investors of any change in risk within five days.

"Chinese banks are issuing WMPs as off-balance-sheet vehicles, which are not reflected in their annual reports. But the fast-growing business could lead to huge risks if a majority of the funds raised through WMPs flow to risky assets like real estate trusts," Yu Haihua, a senior analyst at Tianjin-based Bohai Securities, told the Global Times Thursday.

"Many Chinese investors do not know that banks are not liable for third-party WMPs sold at their branches, so if a default occurs they will push banks to take the responsibility," Yu explained. "And banks may have to share some liability under public pressure."

In the same circular, the regulator limited the investment volume in such assets at no more than 35 percent of a bank's outstanding WMPs and 4 percent of its total assets by the end of the previous year.

"The regulator issued rules aimed at curbing risky investments because it doesn't want the WMP business to grow too fast," Sun Peng, a banking sector analyst with Shanghai-based BOCI Securities, told the Global Times. "Smaller banks will be more affected as the business is an important source of revenue for them."

Xu Wenbing, a senior financial analyst with Bank of Communications, told the Global Times that the new order is expected to have a smaller impact on large banks that have a higher percentage - around 70 to 80 percent - of WMPs invested in principal-guaranteed assets like bonds.

Because of the new requirements, "small and medium-sized lenders will have to squeeze their business scale, and I believe some of them may figure out ways to circumvent the new restrictions," said Sun from BOCI Securities.



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