Evergrande Lenders Circle the Wagons as Debt Crisis Threatens Loans

Banks that backed China Evergrande are circling the wagons in anticipation they won’t get all of their money back from the troubled property giant.

One of the group’s main lenders has made provisions for losses on a portion of its loans, while some creditors are planning to give it more time to repay, Reuters reported, citing four bank executives.

The Chinese banks’ measures, reported for the first time, show how financial institutions in the world’s second-largest economy are bracing for a possible collapse of Evergrande. Its shares plummeted Monday on concern it will default on imminent debt obligations and spark a crisis in the nation’s banking sector, which has huge exposure to the company.

Agricultural Bank of China (AgBank), the country’s third-largest lender by assets, has made some loan loss provisions for part of its exposure to Evergrande, one of the executives said, without giving details.

Meanwhile, China Minsheng Banking Corp and China CITIC Bank, two other major Evergrande lenders, are prepared to roll over some of their near-term debt obligations, two separate sources with knowledge of each situation said.

AgBank, Minsheng, CITIC and Evergrande did not immediately respond to emailed requests for comment.

Banks Retreat

In general, Chinese banks’ exposure to Evergrande has fallen in the past year, and most of their outstanding loans are collateralised or guaranteed by deposits, according to the four sources.

All the sources declined to be named as they are not allowed to discuss individual clients.

Minsheng, for example, has cut its loan exposure to Evergrande to 30 billion yuan from 40 billion yuan over the past 12 months, one of the sources said, adding it also stopped offering new loans to Evergrande in recent months.

The developer epitomised China’s freewheeling era of borrowing and building, with nearly $305 billion in liabilities across loans, bonds, so-called trust products and money owed to contractors and suppliers, among others. It’s spent months trying to raise funds to pay off those debts, including the proposed sale of its electric vehicle unit.

Last year, Evergrande reported total bank and other borrowings of 693.4 billion yuan ($107.4 billion) – including loans granted by trust firms rather than banks, which analysts said accounted for the bigger portion – down from 782.3 billion yuan in 2019.

Despite the retrenchment, an Evergrande collapse, even a managed one, would still reverberate through the Chinese economy given liabilities equal to 2% of the country’s GDP.

Huge Exposure

The company’s bank exposure is wide and a leaked 2020 document, written off as a fabrication by Evergrande but taken seriously by analysts, showed liabilities extending to more than 128 banks and over 121 non-banking institutions.

After that leaked document, the People’s Bank of China (PBOC), the central bank, requested all main Evergrande lenders to review their loan exposure and assess relevant financial risks on a monthly basis, a source at a state-owned bank said.

The PBOC and the sector regulator, the China Banking and Insurance Regulatory Commission (CBIRC), did not immediately respond to Reuters’ requests for comment.

Evergrande is due to pay $83.5 million of interest on September 23 for its offshore March 2022 bond. It has another $47.5 million interest payment due on September 29 for March 2024 notes.

The bonds would default if Evergrande fails to pay the interest within 30 days.

Bailout Uncertainty

Regulators have not given any indication to Chinese lenders of a possible bailout of Evergrande, said a source at one of the main trust creditors.

The editor-in-chief of the Chinese Communist Party-backed tabloid the Global Times on Friday warned Evergrande that it should not bet on a government bailout on the assumption it is “too big to fail.”

Chinese regulators have in the past reined in domestic banks’ unbridled lending to property companies, reiterated the need to curb property speculation, and emphasised the importance of deleveraging in the property sector.

It is possible the government may step in to manage an orderly collapse of Evergrande, said two banking sources familiar with the matter.

“And the regulators have done related risk evaluation among the financial institutions before letting it happen,” one of them said.