By Clare Baldwin and Nishant Kumar
HONG KONG, July 12 The Ping An Insurance Group
Co of China Ltd has, for years, been the
country's financial industry darling.
With close ties to the top of the ruling Communist Party, it
has grown into a financial services giant with a market
capitalization of $48.5 billion, thanks in part to an aggressive
push into banking.
But a government crackdown on risky lending has left Ping
An's banking arm exposed to the turmoil roiling China's markets,
and threatens to create a financial headache for Beijing.
The pressure building on Ping An Bank is the
starkest sign yet that the punishment meted out by Chinese
policymakers to lenders relying too heavily on interbank funding
is rippling wider, threatening larger, systemically-important
It is also sending ripples internationally. Charoen Pokphand
Group, controlled by Thai billionaire Dhanin Chearavanont, is
sitting on a $1.8 billion paper loss on its $9.4 billion
investment in Ping An, a deal partly financed by UBS AG
If China's financial markets continue to wobble, Ping An
Bank would likely have to write down assets and both the bank
and life insurance businesses would need to be recapitalised by
about $20 billion to keep them above solvency minimums - more if
Ping An raises its stake in Ping An Bank - said Thomas Monaco, a
managing director at Hong Kong-based research firm Forensic Asia
"In the case of Ping An you have a fundamental breakdown in
all of their major businesses," said Monaco, who has a "sell"
rating on the stock.
Ping An raised $2.5 billion through a private placement in
Hong Kong in 2011. It got the go-ahead from the China Securities
Regulatory Commission in March to issue 26 billion yuan ($4.24
billion) worth of convertible bonds.
China's central bank briefly allowed short-term interbank
rates to surge last month - sending a blunt signal of its
determination to rein in risky lending that left the financial
Ping An's shares have fallen about 20 percent this year and,
in a more ominous sign of trouble ahead, short-sellers have
piled into its Hong Kong listed shares.
It is now the third most-borrowed stock in the Hang Seng
Index - a measure of interest from "shorts" who sell
borrowed stock hoping to profit from buying it back cheaper
later - according to data from Markit. As much as 39 percent of
the Ping An shares that could be borrowed were out on loan on
July 10, up from about 4 percent in February.
Privately run Ping An is China's second-largest insurer. It
also has a bank subsidiary and a brokerage arm. In addition,
Ping An owns one of China's 66 trust companies, which buy loans
from banks and package them into investment products.
Ping An Bank accounts for only about 11 percent of the
Group's net fees and commission income, but its aggressive
tactics have left its parent company exposed in Beijing's
With one of the smaller branch networks in China - 450
branches in 33 major cities - Ping An has turned to shorter-term
and more volatile wealth management and trust products to
attract depositors. Such products, along with acceptances,
letters of credit and guarantees, accounted for about a third of
the bank's outstanding credit at the end of last year, according
to a June analysis by Fitch Ratings.
Even so, Ping An Bank still has one of the higher
loan-to-deposit ratios in China, and a high overall cost of
deposits, meaning any upset in the market could squeeze the
bank's available cash.
Fitch calculates that 75 percent of Ping An Bank's loans
must be repaid in order to meet short-term cash outflows, and
that it is the least prepared to cope with credit deterioration.
One measure of the difficulty Ping An Bank has in generating
cash from its banking business is its net interest margin, a
metric used to assess how successful a lender is at generating
income compared with its cost of funding.
Ping An Bank's net interest margin fell to 2.37 percent last
year, below the China bank median of 3.4 percent. Ping An said
this was due to the central bank's lower interest rate policy
and to more interbank business.
Ping An Bank's bad loans more than doubled last year.
The bad loans were concentrated in eastern China, and were
fully manifested last year, Daphne Chan, an external spokeswoman
for Ping An, told Reuters in an e-mail. She said that most of
the loans were secured and collateralised, adding that Ping An
Bank was relatively healthy and had very few assets that needed
to be written down.
She said that, while the bank's capital adequacy ratios were
in compliance with relevant regulations, Ping An had plans to
raise additional capital to shore them up.
"We have formulated a series of plans to enhance our capital
adequacy, including a 20 billion yuan private placement and a 50
billion yuan subordinated term debt," Chan said.
Ping An's conglomerate model and exposure to banking is
unique among Chinese insurers, and can be traced back to its
close ties with the Communist Party, which helped it avoid being
broken up in the wake of the Asian financial crisis.
Its core insurance business is still performing well,
although its investment portfolio has suffered due to volatile
Ping An's trust, the fourth-biggest in China, showed a 43
percent increase in net profit last year.
But such trust companies are also part of the vast "shadow
banking" system that Beijing is taking aim at in order to
control credit growth, and the crackdown is expected to force
trusts to pare back their business.
"In our view, Ping An is still the best-run insurance
company in China," Morgan Stanley insurance analyst Ben Lin
wrote in a research report earlier this week, rating the stock
as an "overweight," a rating usually interpreted as a "buy".
"However, concerns about the bank and trust operations could
continue to weigh on the stock," he said.