Opinions held by Dong Wenbiao Shall be Common Understanding of all Bank Bosses

2010-3-15

By YU Fenghui, Shanghai Securities News   March 8,2010

When attending the two sessions, Dong Wenbiao, Chairman of the Board of Director of CMBC said that his bank has no intention for refinancing. “On the meeting of CMBC, I said that we shall not think about refinancing, which really disgrace us to just think about it, let alone mentioning it.”

What he said is really surprising. I have to say that his opinions are really practical and based on the current situation. 
Currently, refinancing by commercial banks is aimed to compensate for their capital funds. Capital funds of commercial banks, as required by international conventions of Basel Accord and regulations of China Banking Regulatory Commission (CBRC), are to prevent and constrain the blind expansion of capital fund, and loan in particular, of commercial banks, for it might bring risks to depositors which are the main source of credit funds of commercial banks.

Capital fund constraint mechanism is to use capital funds as numerator and bank portfolio, in particular loans, as denominator. Basel Accord stipulates that the proportion shall be 8% (CBRC regulates that Chinese banks follow the standard of 11%). If banks lend in blindness, then the denominator will increase, thus the proportion will decrease. The regulated proportion could, on the one hand, increase the numerator, which means capital funds increase, and on the other hand, decrease the denominator, which means loan decrease. In this concern, the capital fund constraint mechanism will work.

The problem exists in most Chinese banks is that, if the capital funds exceed or near the base line, they could not cut down loans in a large scale, which means that it is impossible to control the proportion by changing the denominator. Therefore, banks can only do it by increasing the absolute amount of capital funds through increasing the capital of investors (large stakeholder), issuing bonds on the sub-prime bond market, compensating with profits, and refinancing in the stock market. However, at present, large stakeholders in large banks and small-an-medium sized joint-stock banks in China are not enthusiastic to supplement capital funds. The issuing of sub-prime bonds is constrained by the Notice of CDRC on Improving Commercial Bank Capital Supplement Mechanism, which requires that all commercial banks, when calculating their capital adequacy ratio, shall wholly deduct the amount of supervising capital tools such as the sub-prime debts of other banks held by the Bank and hybrid capital bond from the sub-prime debts, hybrid capital bonds and other supervising capital tools which are calculated as subordinate capitals. Moreover, compensating with profits will decrease the dividends of large stakeholders, which is not preferred by commercial banks. Therefore, refinancing in the stock market is left to be the only choice.

Against the credit skyrocketing last year, most large banks witnessed decrease in their capital adequacy ratio. For ICBC, its capital adequacy ratio decreased from 13.06% in the end of 2008 to 12.60% in the 3rd quarter of 2009, while 12.16% to 12.11% for CCB, and 13.43% to 11.63% for BOC. These three banks are the banks which have higher capital adequacy ratio. If the credit keeps on skyrocketing, even these three banks will have little capital funds left next year. For medium-sized joint-stock banks, some already have their capital funds near the baseline, and some began to refinance in the stock market. CMB, Huaxia Bank and BCM have announced their financing plans. According to some Hong Kong media, BOC plans to raise 50 billion RMB in Hong Kong.

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