China's Huaxia Bank Co Ltd <600015.SS> may face some liability after a rogue employee sold unauthorized wealth management products which weekend reports claimed had stopped making payments, a bank official said on Tuesday.
An employee at Huaxia's Jiading branch, in a Shanghai suburb, sold the instruments issued by the Zhongding Wealth Investment Center without permission, and a police investigation is underway, the bank said on Monday.
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A spokesman for the bank's Shanghai operations told Reuters that police investigators may assign some liability to the bank.
"Currently, investors think Huaxia Bank must take the responsibility and no matter what we argue, they won't listen to us. So we must let the police and judiciary decide the different responsibilities of all parties involved in this case," Huaxia's Shanghai division spokesman told Reuters.
"But it cannot be understood that the bank will pay for the default."
Huaxia has said it was "aware" of reports that the investments could not be repaid when the product matured, but has not confirmed those reports.
So far, there has not been a high-profile case of default by a Chinese wealth management product, many of which are marketed by banks and highly sought by retail depositors for their higher interest rates. Banks' liability for the performance of third-party instruments is therefore untested.
"We will take the responsibility that we should take, but there are some legal procedures to follow," Huaxia Bank's Shanghai division head Zheng Chao told investors assembled at door of his offices, according to the Securities Times on Tuesday.
Bankers and analysts worry that the proliferation of wealth management products, which promise higher interest rates than savings accounts, poses a danger to the Chinese banking system because of their opacity, and the risk that banks may have to cover any default.
Many of the products essentially channel money to the so-called shadow banking system, where they help fund real estate and other projects at very high interest rates.
Chinese investment bank CICC warned in an analyst report on Tuesday of the long-term reputational damage to Huaxia if its depositors lose money, although it acknowledged the Zhongding products were sold without principal or interest guaranteed.
CICC estimated the amount sold through the Jiading branch at 20 million yuan ($3.21 million), citing Chinese media reports. Even if Huaxia had handled all the full 160 million yuan raised by Zhongding, that would equal only about 1 percent of the bank's annual pre-tax profit, CICC said.
"Huaxia should take responsibility for lack of internal controls," CICC wrote. "Short-term pain is better than long-term pain."
Huaxia has not commented on how many depositors bought the products, the amount of money involved, nor what its exposure might be.
Investors' suspicions were raised when one of the wealth management products issued by the Zhongding Wealth Investment Center failed to pay out as scheduled on November 26, the Securities Times said. It said all four products issued by Zhongding have failed to make payments.
Zhongding wanted to raise up to 200 million yuan to invest in a pawn broking operation and an Audi sales company among other projects in Henan, and promised investors annual interest of 11-13 percent, according to its prospectus.
The company that guaranteed the product told Reuters on Monday that it would not honor that guarantee, claiming the documents provided by Zhongding were incorrect.
Huaxia's Shanghai-listed shares traded down 0.2 percent early on Tuesday, compared with a 0.4 percent fall in the broader market . ($1 = 6.2279 Chinese yuan)
(Reporting By Aileen Wang and Lucy Hornby, additional reporting by Hui Li; Editing by Daniel Magnowski)