Wednesday, November 05, 2003
In response to the article below, I wrote this comment:
What is worse is that the central government has decided on another bailout. The PBOC is lobbying for the bailout to be entirely in Ministry of Finance cash injection (in the tune of 800 billion RMB), but the MOF and other agencies are sure to resist such a giant injection of capital. The end result might be a compromise like the one we saw in 1998, namely some MOF injection and some transfer to the AMCs. So, before the AMCs have cleaned up the current batch, they might receive even more NPLs. In a strange way, the AMCs might want another transfer. When I interviewed them in 2001, AMC officials admitted that the good assets will be mostly gone after the first few years. If the AMCs receive another batch of NPLs, they get a fresh injection of good assets (or the 10-15% of it) that they can use to maintain their relatively high recovery ratio thus far.
The article from FT:
China's bad loan disposal worries Moody's
By Francesco Guerrera in Hong Kong
Published: November 5 2003 11:31 | Last Updated: November 5 2003 11:31
China's efforts to clean up the balance sheets of its big four banks have been slow and have failed to eliminate financial risks for the state-owned lenders, Moody's warned on Wednesday.
The credit rating agency said China's four "asset management companies"
(AMCs) have found it difficult to dispose of the Rmb1,400bn ($169bn) of bad loans they took over from the banks in 1999.
A sell-off of the estimated $350bn-750bn of non-perfoming loans (NPLs) made by the big four banks - China Construction Bank, Industrial and Commercial Bank, Agricultural Bank and Bank of China - is crucial to the country's financial stability.
"The performance of the AMCs has been uneven, while an illiquid market and a slow bureaucracy have further hampered the resolution process," Moody's said in a report.
The agency estimates the AMCs have resolved some Rmb300bn of bad loans. With a further Rmb400bn having been converted into equity, the AMCs still have to dispose of half of their NPLs allocation after four years of activity.
Moody's comments come as the Chinese authorities are split over whether to have a direct bail-out of the banks or transfer more of their bad loans to the AMCs.
The agency said further transfers of non-performing assets "need to be conducted with care" as they could stoke up future risks for the banks. According to the report, the interest received by the banks on the bonds issued by the AMCs - Cinda, Huarong, Great Wall and Orient - in return for the NPLs will not bolster their balance sheet. This is because the banks have to keep the interest as a provision against the possibility the AMCs would be unable to repay the bonds when they mature in 2009.
Moody's said it was likely the AMCs would be unable to repay the bond's prin cipal in full, leaving the state-owned banks to foot the bill. "Consequently ... the credit risks - which were first thought to have been isolated from the originating banks - are now creeping back to their starting points," Moody's said.
The disposal of NPLs has been made difficult by the fact that foreign investors have so far been interested in only a small portion of them. In the two most recent transactions, Morgan Stanley bought NPLs worth Rmb10.8bn and a Goldman Sachs-led consortium bought assets with a face value of Rmb1.97bn.
In order to speed up the clearance of the NPLs, Industrial and Commercial Bank of China, advised by Credit Suisse First Boston, is considering issuing a bond backed by Rmb3bn of non-performing assets.
What is worse is that the central government has decided on another bailout. The PBOC is lobbying for the bailout to be entirely in Ministry of Finance cash injection (in the tune of 800 billion RMB), but the MOF and other agencies are sure to resist such a giant injection of capital. The end result might be a compromise like the one we saw in 1998, namely some MOF injection and some transfer to the AMCs. So, before the AMCs have cleaned up the current batch, they might receive even more NPLs. In a strange way, the AMCs might want another transfer. When I interviewed them in 2001, AMC officials admitted that the good assets will be mostly gone after the first few years. If the AMCs receive another batch of NPLs, they get a fresh injection of good assets (or the 10-15% of it) that they can use to maintain their relatively high recovery ratio thus far.
The article from FT:
China's bad loan disposal worries Moody's
By Francesco Guerrera in Hong Kong
Published: November 5 2003 11:31 | Last Updated: November 5 2003 11:31
China's efforts to clean up the balance sheets of its big four banks have been slow and have failed to eliminate financial risks for the state-owned lenders, Moody's warned on Wednesday.
The credit rating agency said China's four "asset management companies"
(AMCs) have found it difficult to dispose of the Rmb1,400bn ($169bn) of bad loans they took over from the banks in 1999.
A sell-off of the estimated $350bn-750bn of non-perfoming loans (NPLs) made by the big four banks - China Construction Bank, Industrial and Commercial Bank, Agricultural Bank and Bank of China - is crucial to the country's financial stability.
"The performance of the AMCs has been uneven, while an illiquid market and a slow bureaucracy have further hampered the resolution process," Moody's said in a report.
The agency estimates the AMCs have resolved some Rmb300bn of bad loans. With a further Rmb400bn having been converted into equity, the AMCs still have to dispose of half of their NPLs allocation after four years of activity.
Moody's comments come as the Chinese authorities are split over whether to have a direct bail-out of the banks or transfer more of their bad loans to the AMCs.
The agency said further transfers of non-performing assets "need to be conducted with care" as they could stoke up future risks for the banks. According to the report, the interest received by the banks on the bonds issued by the AMCs - Cinda, Huarong, Great Wall and Orient - in return for the NPLs will not bolster their balance sheet. This is because the banks have to keep the interest as a provision against the possibility the AMCs would be unable to repay the bonds when they mature in 2009.
Moody's said it was likely the AMCs would be unable to repay the bond's prin cipal in full, leaving the state-owned banks to foot the bill. "Consequently ... the credit risks - which were first thought to have been isolated from the originating banks - are now creeping back to their starting points," Moody's said.
The disposal of NPLs has been made difficult by the fact that foreign investors have so far been interested in only a small portion of them. In the two most recent transactions, Morgan Stanley bought NPLs worth Rmb10.8bn and a Goldman Sachs-led consortium bought assets with a face value of Rmb1.97bn.
In order to speed up the clearance of the NPLs, Industrial and Commercial Bank of China, advised by Credit Suisse First Boston, is considering issuing a bond backed by Rmb3bn of non-performing assets.
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