HONG KONG, 15 September 2019. Pengyuan International has today published a Monthly Newsletter on Chinese Financial Institutions, which highlights the agency’s views on the latest proposed rule by Ministry of Finance (MoF) to urge banks to release their excessive loan loss provisions above two times of minimum regulatory requirement to undistributed earnings. The report is accessible at www.pyrating.com/ResearchPublications/List.

We believe the proposed new rule may eventually have two outcomes as follows:


1.     The new rule may not significantly affect banks that choose to maintain their provision reserves but expose their shadow NPLs and speed up NPL recognitions. It is still a discretionary choice for banks to decide on their NPL recognitions and loan loss provisions required. Internal assessment on capital adequacy to cover NPLs would be a key determining factor on whether a bank can reclassify additional provisions to undistributed earnings.

 

2.     Potential credit negative to some banks that choose to reclassify additional provisions to undistributed earnings. Banks without good internal governance may take chances to distribute earnings to shareholders. However, we believe some of them may not have solid balance sheets to face headwinds if asset quality deteriorates materially or shadow NPLs emerge to surface.


In our view, the MoF’s proposed new rules may be at odds with the CBIRC’s objective to promote banking system stability. At current provision coverage level, we believe that banks need to further build up provisions to endure downward risks instead of profit manipulation.


ANALYST CONTACTS

MEDIA CONTACT

OTHER ENQUIRIES

Primary Analyst

 Cyrus Chan

+852 3615 8319

cyrus.chan@pyrating.com

media@pyrating.com

contact@pyrating.com


Secondary Analyst

 Stanley Tsai, CFA

+852 3615 8340

stanley.tsai@pyrating.com




Committee Chair

 Tony Tang

+852 3615 8278

tony.tang@pyrating.com




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