Caixin
Apr 10, 2020 10:10 PM
FINANCE

Bank of Gansu Is Next in Line for State Bailout

Bank of Gansu is the latest in a string of regional Chinese lenders to be thrown a lifeline by the government.
Bank of Gansu is the latest in a string of regional Chinese lenders to be thrown a lifeline by the government.

Bank of Gansu Co. Ltd. looks set to be the next troubled regional lender to get a state-backed bailout as the government and regulators continue with their campaign to reduce risks in the financial system.

A rescue strategy for the Hong Kong-listed bank was approved this week by the government of Gansu, a province in northwestern China, Caixin has learned from sources close to the lender who declined to be identified. The plan involves a massive capital injection through the sale of new equity to existing shareholders, including the provincial government, regulatory sources with knowledge of the proposal told Caixin. In view of the Gansu provincial government’s weak financial position, the People’s Bank of China (PBOC), the central bank, will offer special loans to help fund the bailout, the sources said.

The plan, which regulators and officials have been working on since September, will also involve the disposal of up to 10 billion yuan ($1.4 billion) of nonperforming assets with losses borne by the provincial government, existing shareholders and new investors, the sources said.

Bank of Gansu, whose balance sheet, profits and key financial metrics deteriorated significantly in 2019, is the latest in a string of regional Chinese lenders to be thrown a lifeline by the government as it intensifies efforts to shore up the banking sector and keep financial risks from spreading through the economy.

In March, Bank of Jinzhou Co. Ltd., another Hong Kong-listed mainland bank, announced that two companies — one controlled by the PBOC and the other owned by the Liaoning provincial government — had agreed to 12.1 billion yuan through private placements that will make them the lender’s biggest shareholders. Baoshang Bank Co. Ltd. was taken over by financial regulators in May, and in December Hengfeng Bank Co. Ltd. said it planned to raise 100 billion yuan mostly from an arm of the country’s sovereign wealth fund and the Shandong provincial government.

Weak balance sheet

News of the Gansu government’s approval of a rescue plan for Bank of Gansu coincides with the company’s announcement of a proposal to issue up to 3.75 billion new yuan-denominated shares, or “domestic shares,” and up to 1.25 billion Hong Kong dollar-denominated H-shares, which could raise around HK$4.2 billion ($542 million) based on Thursday’s closing share price of HK$0.83.

The bank, which detailed its proposal in a filing to the Hong Kong stock exchange on March 30, said the new shares would be issued through private placements to investors who may include existing major shareholders. The bank did not specify how much it would raise but said the funds would be used to replenish its core Tier-1 capital, the highest-quality capital a bank has to absorb losses.

Bank of Gansu also announced its 2019 annual earnings report on March 30, which underscored its mounting problems. Operating income fell 18.5% to 7.23 billion yuan as tougher competition and rising borrowing costs cut into the profit it earned on lending to customers. Net profit crashed 85.1% to 511.3 million yuan after impairment losses more than doubled to 4.3 billion yuan. The bank’s core Tier-1 capital adequacy ratio fell to 9.92% from 11.01% a year earlier, against a minimum requirement of 7.5%, and its nonperforming loan ratio rose to 2.45% from 2.29%, far higher than the industry average of 1.86%.

The bank’s troubles emerged in late 2018 and were triggered in part by the mounting debt problems of privately owned Baota Petrochemical Group Co. Ltd., one of its shareholders. Baota relied on its financing arm to raise money through the issuance of short-term debt securities, and by the end of 2018 had racked up overdue payments of 17.5 billion yuan related to debt financing. A total of 79 commercial banks, including Bank of Gansu, held such debt instruments totaling almost 8.2 billion yuan. Bank of Gansu had also given Baota a line of credit amounting to 5 billion yuan, of which 4.3 billion yuan had been drawn down, according to a report from China Lianhe Credit Rating Co. Ltd.

The Gansu provincial government submitted a report to the central bank and the banking watchdog on the potential risks to Bank of Gansu stemming from Baota’s collapse, and put forward a risk mitigation plan that included the need for some liquidity support from the PBOC.

The bank’s problems have been compounded by a collapse in its share price. The shares were listed in January 2018 at HK$2.69 and by March 31 this year had more than halved to HK$1.15. On April 1, the stock slumped by 43% to HK$0.65 when financial institutions that held equity pledged as collateral for loans made to certain shareholders dumped the holdings after the debts failed to be repaid. Caixin has learned that Huaxun International Group Ltd., one of the cornerstone investors in the bank’s initial public offering, was among the shareholders whose equity was sold.

Liang Hong also contributed to this report.

Contact reporter Timmy Shen (hongmingshen@caixin.com, Twitter: @timmyhmshen) and editor Nerys Avery (nerysavery@caixin.com)

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