Chinese banks falter as slowdown, tightening bite

By Kelvin Soh

HONG KONG (Reuters) - Shares of major Chinese lenders China Construction Bank <0939.HK> and Agricultural Bank of China <1288.HK> fell to multi-month lows on Tuesday, hit by potentially souring loans, an economic slowdown and tighter capital requirements.

By 0332 GMT (11:32 p.m. ET), CCB <601939.SS> was down 2.7 percent to a nine-month low of HK$6.43, while AgBank was down 3.8 percent to a four-month low of HK$3.84, versus the benchmark Hang Seng Index's <.HSI> 0.4 percent rise.

"The risk of a hard landing for the Chinese economy is increasing," said Alexander Lee, a Hong Kong-based analyst at DBS Vickers. "The Japanese earthquake, a slow U.S. economy, the Eurozone problems and a slowing Chinese economy are all building up on the banking sector."

CCB is China's largest mortgage lender at a time when the government is taking increasingly heavy-handed measures to cool real estate prices, prompting Standard & Poor's to lower its outlook on the country's property sector to negative.

AgBank is the biggest lender to rural causes and has the highest non-performing loan ratio and lowest capital adequacy ratio among the big four lenders, raising worries that it may need fresh capital if the government tightens capital requirements.

Further weighing on the two stocks is the impending expiry of their cornerstone investors' lock-up period, with Bank of America <BAC.N> able to sell CCB shares from late August. Bloomberg reported on Monday that Bank of America may sell half its stake in the lender to comply with new industry capital rules.

The lock-up period for AgBank will begin expiring in July, which could lead to a large number of its shares flooding the market if cornerstone investors including Singapore's Temasek <TEM.UL> and the Qatar Investment Authority choose to sell.

"This is a known risk factor that most investors should know about," said Patrick Pong, an analyst at Mirae Asset Securities.

"These cornerstone investors may choose to sell down some of their holdings, and that may weigh on the shares in the short term."


The total amount China's banks have lent compared to the country's GDP size has risen to "alarming levels", and off-balance sheet financing could lead to future asset quality problems, Credit Suisse wrote in a research report on Monday.

Much of the off-balance sheet financing is likely to have gone to local government financing vehicles -- companies set up by provincial or city authorities who are forbidden from borrowing directly from banks.

The country's top banks provided many of the loans as part of a giant economic stimulus program launched by Beijing in late 2008 to counter the global financial crisis.

"There are signs of an economic slowdown in China, and we believe that this may not be just a transient problem as the situation is much more complex with structural problems," Credit Suisse analysts Vincent Chan and Peggy Chan wrote in a note on Monday.

Monetary tightening in China could further pressure the sector, with the central bank raising bank reserve ratios last week for the ninth time since October to curb inflation, which is running at its fastest pace in almost three years.

The People's Bank of China is also likely to raise its benchmark interest rate at least once more and reserve requirements at least three more times this year, a Reuters poll showed in April.

"There's an increasing number of short-term risks in the horizon, and that's something investors need to look out for," said Lee at DBS Vickers.

(Editing by Jonathan Hopfner)