Chinese banks are expected to face grave hiccups in raising funds next year, as profit-conscious investors plan to wait out the period.

This is based on their expectation of a wave of bad loans to hammer the sector and erode already slimming margins being faced by lenders. Financial analysts say the once flourishing Chinese banking sector is ending its worst annual performance in years after putting aside record provisions due to COVID-19 .

As Beijing urged banks to sacrifice profits to help the local economy the projection is that for next year when lenders end pandemic-related loan forbearance in which repayments were suspended or reduced interest costs, banks will have some teething pains in replenishing their cash through borrowing.

Analysts forecast that next year banks would want to  must bolster their capital against loans previously not classified as non-performing. In addition, big and medium-sized lenders also need to improve their capital adequacy as demanded by global and domestic watchdog financial institutions.

Chinese banks need to replenish capital

Data from the internationally renowned rating agency, Fitch indicated that China’s banks raised 1.2 trillion Yuan (US$18 billion) in the first 11 months of 2020, off the pace of 1.5 trillion Yuan for all of 2019. Shenzhen-based brokerage house, Guosheng Securities estimates that the 26 listed banks may need to replenish at least 1.25 trillion Yuan of capital next year.

According to Fitch, “China’s largest banks will need to raise substantial capital or loss-absorbing debt over the next few years.”

The four largest banks in China, Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China all face a shortfall in loss-absorbing debt of 4.7 trillion Yuan by the end of 2024 to meet requirements set by the Basel-based Financial Stability Board.

In the scenario, Fitch assumes risk-weighted assets including loans will grow 8% annually. The Group of 20 big economies adopted “total loss-absorbing capacity” in 2015 as a standard to help ensure the world’s largest financial institutions have the resources for any restructuring while minimizing support from public funds.

However, China’s more than 4,000 smaller and unlisted banks have more acute funding needs, but analysts report that despite 200 billion Yuan of local government special bonds this year aimed at helping recapitalize regional banks more funding toll is needed.

Fund-raising tools include tier-two bonds, perpetual bonds for bigger banks, public share offerings, strategic capital injections and government-led investments for smaller lenders. This was done despite the array of options, however, banks still face challenges in gaining investors’ interest.