Monday, May 2, 2005
Bank refinance to cost Beijing $190 billion
Andrew Yeh / Beijing May 02, 2005
The recapitalisation of the Industrial and Commercial Bank of China(ICBC) and the Agricultural Bank of China (ABC), two of the country’s largest lenders, could cost Beijing up to $190 billion (¤147 billion, £99 billion), according to Standard & Poor’s (S&P).
In research made public yesterday, the credit ratings agency predicted it would cost the Chinese government between $110 billion and $190 billion to recapitalise ICBC and ABC several times what it has already cost to recapitalise Bank of China and China Construction Bank. Beijing last week announced a $15 billion cash injection for ICBC.
S&P’s latest estimate suggested the financial cost of reforming China’s “big four” state banks would be enormous and no guarantee of longer-term profitability.
“Capitalisation at this level ($110 billion) will not be adequate to support rapid growth and the banks do not have much of a cushion to absorb potential future losses,” said S&P. “Given the size of the banks, capital raised from strategic investors and through IPOs is likely to be modest compared with the total cost.”
Ryan Tsang, an S&P analyst, said it would be a “daunting task” to recapitalise ICBC and ABC whichever way Beijing chose to do so.
ICBC and ABC, which is in the worst shape of China’s four main lenders, have combined assets of Rmb9,200 billion ($350 billion , ¤270 billion , £184 billion ), about a third of the country’s total financial assets.
Paul Coughlin, managing director for S&P in Asia, said the most pressing issue was that the big four banks’ profit margins were still unattractive to investors the return on assets before provisions for bad debts are taken into account are a poor 1.2 per cent.
“Any foreign bank that will put billions on the table will do their homework,” said Coughlin. The country’s lenders were also burdened by the government’s antiquated tax policies.
Beijing has used capital injections as a way to clean up its banks’ financial status and make them more attractive to strategic investors.
Last year, Beijing transferred $45 billion from its foreign exchange reserves to BoC and CCB.
“Having bailed out the banks, the issue is whether they will stay bailed out and be profitable,” said Coughlin. “This will be more challenging than they (the government) expect.”
Many experts have been concerned that, despite Beijing’s efforts to inject new capital into its lenders, they may be at risk of developing a new crop of non-performing loans.