Factbox: China's bank capital and provisioning; summary of previous bailout

Reuters

(Reuters) - Factbox on banks' capital and loan-loss provisioning and a summary of China's last bank rescue.

Faced with a chorus of warnings that China risks choking on bad debts, Beijing is pushing banks to raise private capital in an effort to head off the need for a second government bailout in as many decades.

BANK CAPITAL AND PROVISIONS

- Only 0.96 percent of total commercial bank loans were non-performing at the end of June, the China Banking Regulatory Commission (CBRC) says. Most analysts estimate the ratio is 3 to 6 percent. (GRAPHIC:http://link.reuters.com/zuk92v)

- Chinese banks have set aside loan-loss provisions of 1.57 trillion yuan ($257 billion), equal to 2.81 percent of total loans, the CBRC says. That is enough to cover non-performing loans (NPLs) worth 3.5 percent of total loans, assuming a recovery rate of 20 percent on NPLs. (2.81%/(100%-20%)=3.5%)

- Total capital in the commercial banking system reached 8.75 trillion yuan by the end of June, equal to 6.1 percent of total non-risk-weighted assets and 15.6 percent of total bank loans, official data shows. That is enough to absorb a 19.5 percent NPL ratio, assuming 20 percent recovery (15.6%/(100%-20%)=19.5%), in addition to the 3.5 percentage points accounted for by loan-loss provisions.

- Capital levels will increase further as regulators gradually implement higher capital adequacy requirements based on global standards known as Basel III.

- China's system-wide capital adequacy ratio, which measures capital as a share of risk-weighted assets, was 9.9 percent at the end of June. That is higher than both the 9.5 percent rate that the biggest banks must meet by the end of 2013 under China's Basel III rules and the 8.0 percent minimum capital ratio by end-2013 under the global Basel III guidelines.

- As China's Basel III rules are gradually phased in, the biggest banks will have to raise their capital adequacy ratios to 11.5 percent by end-2018, higher than the 10.5 percent ratio in the global Basel III guidelines.

- Banks can absorb increases in bad loans with future profits, without drawing down loan-loss provisions or capital. Earnings growth at Chinese banks has slowed down after expanding rapidly for years, but results from the Big Four banks were all above estimates for first-half earnings this year.

SUMMARY OF THE LAST BANK BAILOUT

- The central government established four asset management companies (AMCs) to buy bad loans from each of the Big Four commercial banks.

- Between 1999 and 2008, the AMCs purchased 2.36 trillion yuan in non-performing loans from the largest banks, Beijing-based research firm GK Dragonomics estimates.

- The AMCs purchased most of the NPLs at face value, enabling banks to record an increase in capital while the AMCs tried to recover as much value from the NPLs as they could. Some other NPLs were carved out at discounts of up to 66 percent.

- Few details are available on what portion of the NPLs' face value the AMCs were able to recover, but some analysts estimate that the average recovery rate was around 20 percent.

- The AMCs paid for the NPLs they purchased mainly by issuing special bonds to the banks. Since the AMCs were set up by the government, they were considered to carry an implicit guarantee. Some additional funding also came from special bonds issued directly by the central bank and finance ministry.

- About 1.6 trillion yuan in bailout-related securities, including the AMC, central bank, and finance ministry bonds, remained outstanding by the end of 2010, GK Dragonomics estimates, indicating Beijing has not yet paid the full cost of the previous bailout.

- In addition to the NPL carve-outs, the banks also received some direct capital injections from Central Huijin Investment Co., the central government's main holding company for state-owned financial companies. Huijin is now a unit of the country's sovereign wealth fund, China Investment Co.

- Though the AMCs have used up most of the funding they received as part of the last round of bailouts, analysts say they are still purchasing new NPLs on a smaller scale by borrowing funds on the interbank market.

- The AMCs have now transformed themselves into commercially oriented and diversified financial companies. They have licenses to engage in businesses including securities underwriting, brokerage, and non-NPL-related asset management.

- Two of the four AMCs, China Cinda Asset Management Corp and Huarong Asset Management Corp have announced plans for initial public offerings, but it is not known whether these firms plan to remain focused on NPL investments.

($1=6.12 yuan)

(Reporting by Gabriel Wildau; Editing by Neil Fullick)

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