Monday, January 24

World’s worst performing bank lent billions to China Evergrande

It was once hailed as the future of Chinese banking, a private lender that would mint money by outnumbering its state-run rivals.

Instead, an unfortunate boost to real estate loans has made China Minsheng Banking Corp. one of the biggest victims of the real estate debt crisis that is hitting Asia’s largest economy.

Hit by mounting losses on loans to developers, including China Evergrande Group, Minsheng shares fell 31% in the 12 months to last week, the worst performance on the 155-member Bloomberg World Bank Index. Hedge funds and other short sellers are more bearish on the lender than any of their global peers.

People familiar with Minsheng’s operations say the bank, founded in 1996 as China’s first non-state-controlled lender, is now in damage control mode. It restructured its real estate finance group to give local branch managers more power, made reducing real estate debt holdings a top priority by 2022 and plans to cut the salaries of some employees by half, the people said. they asked not to be named. information.

Minsheng’s plight underscores the growing consequences of Chinese President Xi Jinping’s crackdown on the real estate industry and other parts of the country’s capital-starved private sector. It also offers a warning to global financial firms that are investing billions of dollars to expand in China: Bets that seem safe can quickly go wrong when the nation’s lawmakers decide to change course.

Minsheng has about 130 billion yuan ($ 20 billion) of exposure to high-risk developers, accounting for 27% of its so-called Tier 1 capital, the most among large Chinese lenders, Citigroup analysts estimated. Inc. in a September research report. It will take years for the bank to resolve its bad debt problem and a capital injection from a stronger rival cannot be ruled out, said Shen Meng, director of Chanson & Co., a Beijing-based boutique investment bank.

“The pursuit of high growth and returns for its private shareholders pushed the bank into many high-risk investments,” Shen said.

Minsheng said in response to questions from Bloomberg that it completed a restructuring of its real estate finance unit in late 2020, transferring some functions to local branches. Employee compensation is largely stable, the bank added.

Chairman Gao Yingxin, who joined Minsheng from Bank of China Ltd. in 2020, pledged to address the lender’s challenges at a shareholders meeting in June. “Ten years ago we were the pearl in the crown, but now our gap with peers is widening,” Gao said. “Corporate governance will go from myopia to long-termism.”

This is not the first time that Minsheng has faced a reckoning after a period of rapid growth. In 2009, Dong Wenbiao, who helped found Minsheng along with other wealthy Chinese entrepreneurs, including pig food magnate Liu Yonghao and real estate mogul Lu Zhiqiang, orchestrated the bank’s push to make loans to the steel industry as part of the goal of becoming the most profitable bank in China. . While Minsheng’s profits rose at an annual rate of nearly 50% for the next five years, a recession in the steel sector eventually led to a backlog of bad loans and Dong left the bank in 2014.

Dong Wenbiao, Chairman of China Minsheng Banking Corp.

Minsheng then turned to the real estate industry, which enjoyed several years of debt-driven growth until the Xi government began imposing increasingly stringent restrictions on property speculation and developer leverage. As defaults began to skyrocket, Minsheng reported a 36% drop in profits in 2020, the most in at least two decades, and another 5% decline in the first nine months of 2021.

More pain is almost guaranteed. The bank is one of Evergrande’s biggest creditors, whose debt crisis rocked global markets over the past year and caused financial contagion in China’s real estate industry. Minsheng had about 29 billion yuan of exposure to Evergrande as of June 2020, according to a letter seen by Bloomberg that the developer sent to provincial authorities that year.

Minsheng said in September that its loans to Evergrande had fallen about 15% since June 2020, without specifying a level. If the bank’s indirect loans to Evergrande through fiduciary products are taken into account, Minsheng’s exposure to the developer exceeds 29 billion yuan, people familiar with the matter said, without providing a specific figure.

Minsheng said in its response to Bloomberg inquiries that all of its loans to Evergrande are tied to residential projects, with sufficient collateral that includes land, property and projects under construction. The bank said it has not invested in Evergrande bonds or cooperated through wealth management products or funds.

Minsheng has also been a major lender to other struggling developers, including China Fortune Land Development Co., Sichuan Languang Development Co., and Tahoe Group Co. Its total real estate loan exposure totaled 417 billion yuan as of June 30. billion yuan since the beginning of 2021, it is still almost double the level five years earlier.

Adding to investors’ concerns are questions about Minsheng’s corporate governance. The bank has received at least three fines exceeding 100 million yuan each in the past three years, more than any of its peers, for regulatory failures including non-compliant developer loans and wealth management products.

The bank’s relationship with one of its largest shareholders, Lu’s China Oceanwide Holdings Ltd., has also drawn attention. Minsheng extended a 21.6 billion yuan line of credit to Oceanwide in December, even after the developer defaulted on a dollar bond. The bank has said it maintains strict monitoring measures for Oceanwide and will control risks by strengthening its collateral.

Many of Minsheng’s challenges have arguably been valued by investors. The bank, which has a market capitalization of $ 25 billion, is listed in Hong Kong for just 0.2 times reported net assets, the lowest on the Bloomberg World Bank Index. JPMorgan Chase & Co., the largest US bank by market value, has a multiple of 1.94.

Credit markets suggest that Minsheng will weather the real estate recession without a liquidity crisis of its own. The bank’s one-year marketable certificates of deposit have an indicated return of about 2.77%, just a few basis points higher than their peers, including China Merchants Bank Co. and Ping An Bank Co. Minsheng will benefit if lawmakers Chinese continue their recent relaxation. of restrictions in the real estate sector, a change that has already helped stabilize the bank’s shares in recent weeks.

Minsheng has linked its future growth to retail banking and small business lending, areas that, for now at least, have the support of the Xi government. The bank has hired several high-profile executives from rivals to lead its transition.

However, Minsheng faces an uphill battle to become a formidable player in consumer banking. The assets of its retail clients totaled 2 trillion yuan in September, compared with 3 trillion yuan for Ping An Bank and 10 trillion yuan for China Merchants Bank.

Short sellers, meanwhile, are betting Minsheng will face further turmoil as China’s developer crisis drags on. Bets against the bank amount to 8.6% of outstanding shares, nearly double the level of the second most short-placed company on the Bloomberg World Bank Index, according to data from IHS Markit.

The tipping point for Minsheng could be a long way off, according to Shen of Chanson & Co.

“With the risk of private developers growing, it will take Minsheng at least three years to clean up its bad debts,” Shen said.

© 2022 Bloomberg

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