Equity Swap Plan Would Be Negative for Banks

(The following statement was released by the rating agency) HONG KONG/SHANGHAI/SINGAPORE, Canada Goose Jackets April 19 (Fitch) A canada goose coats debt for equity swap plan, intended to alleviate mounting bad loans and financial pressures canadian goose jacket on Chinese firms, would be credit negative for the banking sector, says Fitch Ratings. Fitch believes that banks’ ability to support such a plan in a large scale is limited given their slowing profit growth, rising credit costs and more stringent regulatory capital requirements. The extent of the impact on banks will depend on the details of the plan, including its uk canada goose outlet size and the types of companies that will be allowed to cheap Canada Goose participate. Such a swap would be uk canada goose equivalent to around 24% of Chinese commercial banks’ (not including policy banks) NPLs and special canada goose uk black friday mention loans, or 1% canada goose clearance of total domestic loans in the banking system. The scale of the canada goose clearance sale reported swap plan would not be significant for the banking system as canada goose uk shop a whole, but if the programme https://www.canadagoose-jackets-online.com were to be markedly scaled up, it could have a sufficient effect on bank assets and capital to be negative for bank credit profiles. A debt to equity swap would increase risk in banks’ portfolios. Equities have lower priority of claims relative to debt during the liquidation process and some bank loans have collateral, which can provide protection canada goose and mitigate losses in the event of default. canada goose outlet Furthermore, while equities provide higher returns to compensate for risk, the returns are usually more volatile and dependent on company earnings and dividend policies. Equity investments are also likely to have a higher risk weight than bank loans. As such, a large scale debt to equity swap is likely to weaken banks’ capital positions. Canada Goose Parka Generally speaking, Chinese banks are not allowed to invest in equities of non bank corporations, and China’s banking regulator requires buy canada goose jacket cheap banks to apply a 400% risk weight on equity investments, which must be held for policy reasons and have special approval from the Canada Goose online State Council. The higher capital requirement on equity investments may encourage the banks Canada Goose Online to move these exposures off their balance sheets or classify them differently through alternative credit products with more complicated transaction structures. This would reduce transparency and make it more difficult to assess bank risk. More broadly, a debt for equity swap without fundamental Canada Goose sale improvement in borrowers’ creditworthiness will only push back resolution of growing asset quality pressures and enable risk to further accumulate in the banking system. To be sure, if companies are able to use the swap to improve their financial profiles and sustainability of their business models, then it could help to resolve the NPL issue and contribute to macroeconomic reform over the long run. As such, the types of companies that will be allowed to use the swap programme will determine to what extent it will have a negative effect on banks. The level of state support provided for the programme could canada goose store also be a factor in quantifying the effects on banks. The swap would reinforce the strategic importance banks play in cheap canada goose uk maintaining financial stability and would underline the sovereign’s strong propensity for support. However, it would also highlight the dilemma Chinese banks face between supporting policy directives and maintaining their standalone credit profiles. Such a programme would be much more complicated as bondholders for a given issue tend to be far more fragmented than bank lenders. A bond swap would also likely trigger significant uncertainty in the nascent domestic bond market. Contacts: Katie Chen Associate Director canada goose black friday sale +86 10 8517 2135 Fitch Ratings (Beijing) Ltd. The above article originally appeared as a post on the Fitch Wire credit market commentary page. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‚CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON Canada Goose Outlet THE FITCH WEBSITE.

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