China Addressing Capital Crunch Facing Banks: Analysts

China’s Central Huijin Investment Co.’s plans to cut the dividend payout ratio for three of its “Big Four” lenders, is a sign that Beijing is waking up to capital constraints facing the banking sector, Fraser Howie, Managing Director at CLSA Singapore, said.

Wang Zhao | AFP | Getty Images Bank of China

“It’s not necessarily a crisis, or a collapse (of the banking system), but basically the dividend ratio has been too high and their capital base has been getting eroded because of poor loans…this is a move that was certainly needed,” Howie told CNBC Monday.

Chinese banks, which were encouraged to go on a lending spree by the government to boost liquidity and spur growth post the 2008 global financial crisis, now face capital strains and the risk of rising non-performing loans.

According to the state parent company Huijin’s website, the move will reduce the ratio for Industrial and Commercial Bank of China (ICBC), Bank of China (BOC) and China Construction Bank (CCB) by 5 percentage points to 35 percent of their 2011 earnings. Analysts say this will allow the banks to save 10-15 basis points of their capital adequacy ratios per annum.

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“It shows that Huijin is willing to allow the banks to adopt a more sustainable capital strategy,” adds Mike Werner, Senior Equity Analyst, Chinese & HK Banks at Sanford C. Bernstein.

However, Jim Antos, Chinese banking analyst at Mizuho Securities says the impact of a 5 percentage point’s dividend payout reduction is “trivial” for the large lenders.

“We estimate Industrial and Commercial Bank of China could put an extra 10.5 billion yuan ($1.67 billion) into retained earnings. For Bank of China, the savings would be around 6.1 billion yuan ($968 million),” Antos said.

Antos, who has a neutral call on CCB and ICBC and an underperform call on BOC, says this decision has not changed their investment view on the Chinese lenders, adding that the move was expected.

In addition to helping the banks preserve capital, Werner believes there is another motive behind Huijin’s move to lower the dividend payout.

“Huijin must generate a certain amount of cash in order to pay off the debt issued to purchase their stake in the Chinese banks from the PBOC in 2007 as well as the debt issued in 2010 that was used to participate in the banks’ rights offerings that year,” he said.