Baoshang Bank's asset sale will dampen contagion risk: Moody's

Huishang Bank plans to buy some of its assets and form a new bank.

The sale of Baoshang Bank's assets outside of Inner Mongolia to Huishang Bank accelerates the bank's resolution and dampens related contagion risk, says Moody’s.

On February 6, Huishang Bank announced their plans to buy Baoshang Bank’s assets outside of Inner Mongolia along with its four branches outside the region. Huishang also plans to set up a new bank in Inner Mongolia, investing up to $520m (RMB3.6b).

Huishang had total assets of $160b (RMB1.1t), compared with Baoshang Bank’s total assets of $61.9b (RMB432b). Huishang’s non-performing loan (NPL) ratio was 1.03% and core equity Tier 1 ratio was 8.44% at 30 June 2019, with an annualized return on average assets of 0.93% in the first half of 2019.

Further, the China Banking and Insurance Regulator Commissions (CBIRC), which took over Baoshang Bank in May 2019, along with Huishang will jointly delegate the work of asset and capital verification of the sale to external agencies based on the value of related assets and liabilities. This shows the regulator's agreement to the asset sale.

“Carving out Baoshang’s businesses outside of Inner Mongolia for sale to some relatively strong regional banks, and the sale involving strong regional banks, government funds and SOEs in operating the Inner Mongolia business will accelerate the bank’s resolution, support market confidence in the local financial system and could strengthen local banking operations by introducing expertise and capital,” the note read.

The acquisition also meant that Huishang, will face higher capital needs and execution risks as it enters into new markets.

“Branches purchased by Huishang are located in Beijing, Shenzhen, Chengdu and Ningbo, which are cities with vibrant economies in China. Whether Huishang can capitalize on the added franchise depends on its management and operations in the new market as well as synergies with its current operations,” Moody’s further noted.