china photoChina’s bank bailouts have according to UBS’s China Financial strategist Jason Bedford.

According to Bedford and team’s analysis of 765 banks in China, it appears that the country is finally starting to deal with its bad debts problem via bank recapitalisations, bailouts and cash calls.

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To arrive at this conclusion UBS’s research team used to different datasets: the 2015 financial statements of 173 banks accounting for 92% of China’s total commercial banking sector assets and the corporate registrations of nearly all banks in China to measure share capital injections and shareholder changes.

After combing through all this data, UBS’s team can present a fascinating picture of China’s banking sector. The figures show that not only has a much larger amount of capital been raised among smaller regional banks compared to listed banks over the past two years, but smaller banks have also been more aggressive in disposing of impaired assets.

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What’s more, the team has identified five banks that have already been bailed out: Bank of Dalian, Bank of Langfang, Bank of Inner Mongolia, Jiangxi Bank and Shanxi Qinnong RCB.

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Recapitalisations in China’s banking sector have been growing in number since the beginning of the credit cycle 24 months ago.


Historic data shows that China’s unlisted banks (JSBs, CCBs and RCBs) raised more than Rmb220 billion ($35 billion) over the past 24 months. Largest listed banks have issued a total of Rmb 372 billion in preference shares over the same period with another Rmb51 billion announced but not yet completed (listed banks cannot raise capital below 1x last audited book value as nearly all listed Chinese banks are currently trading below book, preference shares are the preferred route).

The most aggressive recapitalizations have taken place in regions where economic headwinds are significant. It is also noticeable that small institutions have seen the sharpest increases in capital. Among those that raised capital, the average size of the share capital increase was 121%. The most thoroughly recapped province was Sichuan where 80% of local banks raised capital >15%.

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Along with significant recapitalisations, China’s banking sector has also been writing off a significant volume of non-performing loans. UBS estimates that the 173 banks covered in the report have written-off between Rmb1.65 trillion to Rmb1.8 trillion of loans from 2013 to 2015. This is not an immaterial number. As a percentage of the total number of loans outstanding, write-offs equate to 2.05% of total loans or 142% of non-performing loans at year-end 2015.


On the topic of bank bailouts, UBS writes the following:

“Transparency in China can be surprisingly good but with a great deal of variance. The list below shows banks that have disclosed entering into some form of asset resolution plan / bailout in 2015:

Bank of Dalian – The largest bailout of the banks in our list, Bank of Dalian entered into multiple high risk asset and non-performing asset transfers and a recapitalisation in 2015 under a “bad debt for equity swap”, which ultimately saw a transfer of ownership to Orient AMC

Bank of Langfang – Entered into a Bad Asset Resolution and Disposal plan on 27 March 2015 and a recapitalisation of the bank’s share capital on 24 August 2015

Bank of Inner Mongolia – The board approved a Non-Performing Asset Resolution and Disposal Plan on 1 June 2015.

Jiangxi Bank – Merged Bank of Nanchang with distressed lender Jingdezhen City Commercial Bank, which had an implied NPL ratio of >30%, and issued an asset resolution plan on 10 October 2015

Shanxi Qinnong RCB – The single largest recap of a bank in 2015, it was formed by the merger of six credit cooperatives and a 1,702% increase in its capital base, part of which was in the form of bad debt for equity.”

Here are some charts from the report.

UBS 7   UBS 4 UBS 3  UBS 1