Caixin
Dec 22, 2020 08:17 PM
FINANCE

Province to Raise $2.3 Billion for New Bank Born From Merger of Local Lenders

Chinese authorities have been working to consolidate the banking industry and encourage smaller, weaker banks to merge.
Chinese authorities have been working to consolidate the banking industry and encourage smaller, weaker banks to merge.

A northern Chinese province has announced it will capitalize a new bank born from the merger of small city lenders by selling special-purpose bonds (SPBs), as the authorities look to get Shanxi’s scandal-ridden banking industry back on its feet.

The Shanxi provincial government will issue 15.3 billion yuan ($2.3 billion) of SPBs on Wednesday to replenish the capital of the as-yet-unnamed new commercial lender, according to statements (link in Chinese) it released Friday. The bonds will mature in 10 years and received the highest possible “AAA” rating from Golden Credit Rating International Co. Ltd.

In return, a local state-owned investment company will hold a stake in the new city bank. The company will derive dividend income and other profits from the equity, which will be eventually sold off to repay bondholders, according to the statements.

According to a merger plan released in August, the new bank will be created from the merger of Jincheng Bank Co. Ltd., Yangquan City Commercial Bank Corp. Ltd., Jinzhong Bank Co. Ltd. and Changzhi Bank Co. Ltd. Datong Bank Co. Ltd. will also merge with them, Caixin previously reported. The resulting entity will have total assets amounting to more than 300 billion yuan, according to financial statements of the five banks.

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Exclusive: Fifth Lender Set to Join Merger in Shanxi’s Scandal-Hit Banking Sector

Chinese authorities have been working to consolidate the banking industry and encourage smaller, weaker banks to merge. That task has taken on added urgency amid an economic slowdown and the fallout from the Covid-19 pandemic, which have exposed poor risk control and lending decisions at several institutions, as well as putting additional pressure on their balance sheets and profits.

The bank merger in Shanxi appears to have been driven by a multibillion yuan corruption scandal uncovered at the Shanxi Rural Credit Union that may have had an impact on those particular lenders, sources close to the matter have told Caixin. More than 10 executives at the five city commercial banks have been placed under investigation, one source said.

In July, the State Council, China’s cabinet, allowed local governments to use part of this year’s quota of 3.75 trillion yuan of SPBs to replenish the capital of small and midsize banks. Caixin revealed exclusively in June that around 200 billion yuan of the national SPB quota would be earmarked for the program.

SPBs are a kind of local government debt that funds infrastructure and public welfare projects that are commercially viable. They are generally repaid from income generated from the specific projects they fund.

On Dec. 7, the Guangdong provincial government issued 10 billion yuan of SPBs to recapitalize local small and midsized banks, making it the first local government to do so. Over the past month, several other provincial governments, including those in Sichuan and Guangxi, have announced plans to issue SPBs to recapitalize local banks.

Timmy Shen and Han Wei contributed to this report.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Joshua Dummer (joshuaudummer@caixin.com)

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