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China Merchants Bank Discloses Passing Grade on New Financial-Risk Test

By Wu Hongyuran, Zheng Lichun and Wang Yuqian

(Beijing) — China Merchants Bank said it had earned the “B” passing grade on the central bank’s new test for financial risks, despite scoring excellently on some of the most important indicators.

This is the first time a major bank has publicized how well it did in the test, which is known as the Macro Prudential Assessment. Banks get a grade of either “A,” “B” or “C,” with “C” being failing.

The People’s Bank of China put the testing system into place last year, which on a quarterly basis gives banks a health check and hands out grades based on the evaluation of a bank’s condition in seven categories.

When it voluntarily released its grade, China Merchants also revealed information about the performance of all of China’s banks: Most banks tested in the past year have received a “B” grade. Only a few small lenders, including some city commerce banks, received a failing grade, said Wang Liang, a China Merchants executive who serves as assistant to the chairman. It’s unclear whether any bank has received the highest grade of “A.”

If a bank receives an “A,” it gets preferential treatment, such as getting interest payments on its reserve funds. Failure to meet the standards are punished.

China Merchants is one of the country’s oldest commercial banks and the fifth-largest bank by market capitalization.

Tian Huiyu, China Merchants’ president, said in a news release Monday that the bank has “absolute advantages in capital adequacy ratios and leverage ratios, assets and liabilities, liquidity conditions and interest-rate setting.” These are some of the most important indicators used to grade a bank’s performance in the testing system.

Overall, however, the bank received only a “B” passing grade, just like the majority of other banks in the country, according to Tian. He didn’t say what areas the bank needed to improve in order to get the highest mark.

The bank said in its annual report released yesterday that the “safety margin” it had enjoyed on capital adequacy ratios narrowed after the MPA system started monitoring banks’ off-balance-sheet wealth management plans this year. Previous requirements that linked a bank’s investment to the amount of equity capital it needs to have didn’t cover their off-balance-sheet operations.

China Merchants had 2.38 trillion yuan ($346.5 billion) in outstanding wealth management products as of the end of December, second to only those managed by the Industrial and Commercial Bank of China and up more than 30% from a year earlier. More than 2 trillion yuan of the investments came from off-balance-sheet wealth management plans, according to the bank’s report. This mean potentially a big increase in equity investment the bank must have to meet the regulator’s standards, although it’s unclear by how much.

The bank announced on Friday it will issue preferred stock to raise up to 35 billion yuan through private placement at home and abroad to replenish capital, citing as one reason a likely increase in the central bank’s requirement for capital adequacy ratios.

Wang of China Merchants said the central bank tells every bank only its grade but not their specific score in each category.

The two most important testing categories are interest-rate setting and capital adequacy ratios and leverage ratios, which allow the central bank to prevent banks from expanding too quickly by taking on excessive risk that may not show up immediately on their balance sheets. Failure to meet standards in either one of the categories would result in a bank getting an overall grade of “C,” regardless of its other performance.

A “C”-grade bank receives a lower interest on the reserve fund they keep with the central bank, and faces restrictions such as temporarily suspension of access to central bank loans. Banks that fall short on requirements in any two of the other five categories would also receive the failing grade.

Contact reporter Wang Yuqian (yuqianwang@caixin.com)

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