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Banks Tap Credit Potential to Meet Surging Capital Demand

01-29 15:41 Caijing
Domestic banks' lending capacity will be put to the test in 2013 as huge demand for capital in the real economy is widely expected.

By staff reporters Dong Yuxiao and You Xi

Domestic banks' lending capacity will be put to the test in 2013. Statistics show that the National Development and Reform Commission approved projects with a total value of 7 trillion yuan in the second half of 2012, portending a huge demand for capital by the real economy this year.

The banks' lending capacity has been drained by years of enormous lending, with loan-deposit ratios and capital adequacy ratios barely meeting regulatory standards.

As a result, tapping credit potential to provide abundant capital for urbanization and stabilize macroeconomic growth has become a challenge facing policymakers and domestic banks.

Caijing learned that China's four major state-owned banks are now planning to extend a total of 3 trillion yuan in new credit in 2013, with growth rates averaging between 10-12 percent, representing a modest increase over last year. Specifically, the Industrial and Commercial Bank of China (ICBC) is planning to extend approximately 900 billion yuan of new credit, Agricultural Bank of China (ABC) 700 billion yuan, Bank of China (BOC) 500 billion yuan, and China Construction Bank (CCB) 840 billion yuan.

In recent years, aside from their annual loan quotas decided by the differential deposit reserve ratio system launched by the People's Bank of China, the country's central bank, domestic commercial banks' lending capacities have also been under various restrictions set by the China Banking Regulatory Commission (CBRC) in areas such as loan-deposit ratios, capital adequacy ratios, and percentages of medium- and long-term loans.

In practice, regulators are adjusting the criteria in real time to keep pace with macroeconomic conditions.

A source at a joint-stock bank stated that authorities tend to tacitly and slightly loosen regulatory standards on banks' loan-deposit ratios when the economy slows down.

A number of banking industry insiders predicted that certain branches will still be allowed to exceed regulatory standards on loan-deposit ratios, in order to release their lending potential.

Regulatory standards on capital adequacy ratios are also expected to ease up somewhat. Bankers have been struggling to reach the required standards after draining their lending capacity by massive lending in 2008-2009.

Refinancing activities by commercial banks slowed down in 2012, during which only three equity financing deals were closed. CBRC statistics show that as of the third quarter of 2012, the average capital adequacy ratio for major domestic commercial banks stood at 13.03 percent while the core capital adequacy ratio was 10.58 percent, both of which are above the regulator's minimum requirements.

Besides, banks may gain access to new capital-replenishing channels in the future. Caijing learned that a number of innovative instruments including preferred stock and hybrid debt instruments are currently being developed and may be launched soon.

In addition to a modest credit expansion, banks are now planning to aggressively grow their off-balance-sheet businesses. RMB wealth management products, a surging off-balance-sheet business, allow banks to circumvent controls on credit scale, boost profit growth, and meet customers' demand for financial services.

CBRC statistics show that as of the end of 2012, banks' outstanding wealth management products amounted to 7.6 trillion yuan, up almost 66 percent year-on-year.

A source at a major state-owned bank's wealth management business department said that regulators tacitly allowed commercial banks to develop wealth management products last year, though the banks are required to report the size of their wealth management business on a quarterly basis. The source's bank has drawn up its 2013 plan and is busy developing new products to seize market share.

Some predict that the new round of investment may bring about significant risk.

Stephen Green, head of research at Standard Chartered Bank Greater China, wrote that non-performing loans are set to rise again this year, in a research report published Jan. 7 entitled China-Dreaming of Economic Reform in 2013.

Prior to this, the CBRC stated at its annual work conference that the priority for 2013 is to fend off systemic and regional risks.

1 yuan = 16 U.S. cents

Full article in Chinese: http://magazine.caijing.com.cn/2013-01-27/112466049.html

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