Sizzling Bank Lending Cools Down in July

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After an outburst of lending during the first half of 2009, Chinese banks ebbed the flow of new loans in July.

Data from China's central bank indicate that new loans totaled 355.9 billion yuan in July, down 77 percent from June, and 25.9 billion yuan less from the same period in 2008.

Such numbers, although dramatic are in many ways predictable. Actually, the swift contraction in new lending does not seem to be related to any policy reversal. Many in the industry predict another small loan surge this September.

On August 12, both the Shanghai and Shenzhen equities indexes dropped by more than 4 percent. Many market observers believe that expectations of a credit contraction contributed to this downward adjustment in ‘A' shares. One private equity fund manager said he had noticed credit tightening in the first half of this year and noted he'd heard from many property developers that credit was becoming more difficult to obtain.

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July Downward Adjustment

The lending data of China's big four, Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), and Agricultural Bank of China (ABC), has been carefully followed. State-owned commercial banks, which represent half of bank loans outstanding, are expected to support the central government's economic recovery stimulus, at the same time, they also need to maintain sound risk management policies and demonstrate profit making ability to investors.

New loans from the big four banks shrank significantly in July. The Bank of China issued 80 billion yuan, CCB issued 55 billion yuan, ICBC issued 33 billion yuan, and ABC, meanwhile, saw its total loan portfolio shrink by 3 billion yuan. The data shows that lending has declining since June, when Bank of China and ABC each issued more than 170 billion yuan, and ICBC and CCB each wrote loans of roughly 60 billion yuan.

One distinguishing characteristic of new loans in July was that consumer loans increased by 236.5 billion yuan, accounting for 66.5 percent of all new credit, a big percentage increase from the first half. Personal loans represent just 14 percent of the 7.37 trillion yuan in total loans outstanding for the January to June period.

Gao Shanwen, chief economist with Essence Securities, said personal loans increased as a result of reviving real estate purchases in the second quarter. But, as property prices rebound to the high levels of 2007, individual credit will decline, he added. It is unlikely that personal loans will be a driver for new lending increases in the future.

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Lending Appetite Remains

Huaxia Bank, the first commercial bank to release its financial statement for the first half of 2009, reported losses per share at 13.44 yuan for the period.

Industry sources argue that the bank had a liquidity crisis due to excessive lending. As of June 30, the bank extended 70.4 billion yuan in loans, up nearly 20 percent year-on-year.

The situation was similar for many smaller commercial banks.

One bank executive said that expect for the big four, most Chinese banks are now constrained by a lack of liquidity, reflected in declining capital reserves and rising loan to deposit ratios. Regulators estimate that average capital reserves in the first half will fall below 11 percent for commercial banks.

Minimum capital adequacy requirements are 10 percent for small–to–medium size banks. At the end of June, Huaxia Bank had just 10.6 percent capital. Meanwhile, banks will find it more difficult to issue subordinate debt to supplement capital. On August 13, China Merchants Bank said it will increase capital about 15 billion yuan to 19 billion yuan through a rights offering. Other banks also plan to recapitalize, including the Bank of China.

Another constraint on liquidity in the second half is uncertainty about deposits. The banker referenced earlier said a majority of deposits in the first half came from loan proceeds. With increasing cash flow into the real economy, a reduction in new loans, and adjustments in the capital markets a sustained growth in deposits is uncertain. Some banks have pushed their loan to deposit ratios to the regulatory limit.

GAO Shanwen said many banks will continue to suffer from capital constraints. But banks normally have back-up instruments such as government bonds, short-term central bank notes, etc. Although these sources are less liquid, they can be cashed in to finance new lending.

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One source from a large commercial bank said, "banks are struggling to make loans right now." One common approach is through syndication, with multiple banks providing a share of the credit. The lead bank in a syndicate earns a significantly larger fee as manager.

Unlike some smaller institutions, the four largest banks have few liquidity problems.
One banker said, "Right now, the European and U.S. economies seem to have bottomed out. If some industry sectors forecast global improvements, it is likely these banks may increase lending this year."

Bankers predict total lending could exceed 10 trillion yuan for the entire year. In the second half, banks were expected to issue at least 2.6 trillion yuan in new loans. Bankers predict the majority of credit will be issued before October.

There may also be a small peak toward the end of September. Chen Shun, vice president with J.P. Morgan Securities (Asia) said that 500 or 600 billion yuan in new loans for September is easily achievable. A more optimistic prediction is over one trillion yuan.

An executive from a state-owned commercial bank told Caijing that "banks are hoping to complete their strategic rearrangements and adjust their banking policies before the state's monetary policy actual reverses."