Banking & Finance

From the ashes

Huishang takes control of the remnants of Tomorrow Group’s failed bank


A new dawn: Huishang’s HQ

It’s a problem that long predated the Covid-19 outbreak and its resolution has been in gestation since last May: the restructuring of the troubled Baoshang Bank.

Huishang Bank, a major player in Anhui province, has emerged as a white-knight investor in Baoshang, a lender from Inner Mongolia that has been a ward of the state for about nine months. Formerly owned and controlled by Xiao Jianhua’s Tomorrow Group, Baoshang’s prospects took a downward turn after the tycoon’s detention by the authorities (see WiC454). The restructuring process has been difficult but after months of speculation, Huishang revealed on February 6 that it would be taking control of all of Baoshang’s assets outside Inner Mongolia, which total Rmb91.2 billion ($13.02 billion) in net value. That includes Baoshang’s branches in Beijing, Shenzhen, Chengdu and Ningbo, giving the provincial player a bigger presence in some of the most developed pockets of China’s economy.

Instead of paying a set price, Huishang is acquiring the assets through “a one-off capital contribution” of Rmb3.6 billion to a new financial institution known as Mengshang Bank with registered capital of Rmb20 billion. Huishang gets a 15% stake in return, while the local government of Inner Mongolia will have a 50% interest, the central bank’s deposit insurance fund 30%, and state-owned China Construction Bank 5%.

“Huishang got this deal because it had been too badly burnt by its interbank investments linked with Baoshang,” claimed Huaxia Times, noting that Huishang’s losses could amount to as much as Rmb6 billion. That leads to speculation that the deal is actually a two-part arrangement, swapping debt for equity in one and assets in the other. With the transaction, Huishang also earned approvals to raise funds though selling new shares, as well as issuing Rmb20 billion in tier-two capital bonds.

Policymakers are hoping that the restructuring of Baoshang – the first local lender to be taken over by regulators in two decades – could serve as a model as the country’s smaller banks brace for more defaults and meltdowns.

First, it breaks the convention in which local and central governments have been the only players in bailouts. Second, it provides a protocol for stabilising small and mid-sized lenders, which are often seen as the weakest link in China’s banking sector. Such smaller players had gone on an aggressive lending binge between 2013 and 2017 having taken advantage of the liberalisation of the asset management sector and by raising uncollateralised, short-term debt in the interbank market. Three years ago regulators choked off such fundraising strategems, calculating that the risks could ripple through the financial system as a whole (see WiC475). The health of smaller banks remains a concern.

The restructuring comes at a time when the coronavirus outbreak has brought a portion of the economy to a standstill. In response the central bank reduced the loan prime rate, a key lending rate, on Thursday. And to help thousands of small-and medium-size enterprises stay afloat, regional banks have been asked to tolerate a higher threshold for bad loans. According to a recent survey by academics from Peking and Tsinghua universities, 85% of China’s SMEs have cash holdings that don’t endure much beyond three months.

Fan Yifei, deputy governor of the central bank, told media last Friday that the overall ratio of non-performing loans is “relatively low”. But S&P Global, a credit rating agency, is warning that NPLs in China’s banking sector could surge by Rmb7.7 trillion to Rmb10.1 trillion in a worst-case scenario in which the virus doesn’t peak until April. If the non-performing loan ratio rises above 6%, banks’ provision coverage could fall to 55% from 188%, it adds. Tier-one capital adequacy ratios would also drop, giving lenders less ability to buffer the wider economy against the ongoing crisis.

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