He was once hailed as the future of China’s bank, a private lender that would strike money by outwitting public rivals.

An unfortunate surge in home loans instead turned China Minsheng Banking Corp. one of the biggest victims of the real estate debt crisis that is shaking Asia’s largest economy.

Beaten by growing losses on loans to developers, including China Evergrande Group, Minsheng’s stock has fallen 31% in the 12 months to last week – the worst performance on the Bloomberg World Banks Index, composed of of 155 members. Hedge funds and other short sellers are more bearish to the lender than any of their global peers.

People familiar with Minsheng’s operations have said the bank, founded in 1996 as China’s first non-state-controlled lender, is now in damage control mode. He has restructured his real estate finance group to give more power to local branch managers, made reducing real estate debt a top priority for 2022 and plans to cut some employees’ salaries in half, the people said, asking. not to be appointed to discuss information.

Minsheng’s plight underscores the growing fallout from Chinese President Xi Jinping’s crackdown on the real estate sector and other parts of the country’s capital-hungry private sector. It also offers a warning to global financial firms investing billions of dollars to grow in China: Bets that seem safe can quickly turn sour when the country’s policymakers decide to change course.

Minsheng has about 130 billion yuan ($ 20 billion) of exposure to high-risk developers, or 27 percent of its so-called Tier 1 capital, the largest among major Chinese lenders, analysts at Citigroup Inc. in a September research report. The bank will need years to resolve its bad debt problem and a capital injection from a stronger rival cannot be ruled out, said Shen Meng, director of Chanson & Co., a boutique investment bank based in Beijing.

“The pursuit of high growth and returns for its private shareholders has prompted the bank to undertake many high-risk investments,” Shen said.

Minsheng said in response to questions from Bloomberg that he completed the restructuring of his real estate finance unit in late 2020, transferring some functions to local branches. Employee compensation is largely stable, the bank added.

Chairman Gao Yingxin, who joined Minsheng from Bank of China Ltd. in 2020, pledged to meet the lender’s challenges at a shareholders’ meeting in June. “Ten years ago we were the pearl in the crown, but now our gap with our peers is widening,” said Gao. “Corporate governance will go from myopia to the long term. “

This is not the first time that Minsheng has faced a balance sheet after a period of rapid growth. In 2009, Dong Wenbiao, who helped found Minsheng alongside other wealthy Chinese businessmen including pig feed mogul Liu Yonghao and real estate mogul Lu Zhiqiang, orchestrated the push for the bank in the steel industry loans with the aim of becoming China’s most profitable bank. . As Minsheng’s profits surged at an annual rate of nearly 50% over the next five years, a downturn in the steel industry ultimately led to a stack of bad loans and Dong left the bank in 2014.

Minsheng then turned to the real estate industry, which saw several years of debt-fueled growth until Xi’s government began to impose increasingly stringent restrictions on real estate speculation and influence. promoters. As defaults began to skyrocket, Minsheng reported a 36% drop in profits in 2020 – the largest in at least two decades – and another 5% drop in the first nine months of 2021 .

No more pain is anything but guaranteed. The bank is one of Evergrande’s biggest creditors, whose debt crisis has rocked global markets over the past year and sparked financial contagion in China’s real estate sector. Minsheng had around 29 billion yuan of exposure to Evergrande as of June 2020, according to a Bloomberg-viewed letter the developer sent to provincial authorities that year.

Minsheng said in September that its loans to Evergrande had declined by around 15% since June 2020, without specifying a level. Including the bank’s indirect loans to Evergrande via trusted products, Minsheng’s exposure to the developer exceeds 29 billion yuan, people familiar with the matter said, without providing a specific figure.

Minsheng said in response to Bloomberg’s questions that his loans to Evergrande are all tied to residential projects, with sufficient collateral, including land, property and projects under construction. The bank said it had not invested in Evergrande bonds or cooperated through wealth management products or funds.

Minsheng has also been a major lender to other troubled developers including China Fortune Land Development Co., Sichuan Languang Development Co. and Tahoe Group Co. Its total home loan exposure was 417 billion yuan in the year. June 30th. billion yuan since the start of 2021, still nearly double the level five years earlier.

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Investor concerns are compounded by questions about Minsheng’s corporate governance. The bank has been hit with at least three fines exceeding 100 million yuan each in the past three years – more than any of its peers – for regulatory breaches, including developer loans and products. non-compliant asset management.

The bank’s relationship with one of its major shareholders, Lu’s China Oceanwide Holdings Ltd., also raised eyebrows. Minsheng extended a 21.6 billion yuan line of credit to Oceanwide in December, even after the developer defaulted on a dollar bond. The bank said it maintains strict oversight measures for Oceanwide and will control risks by strengthening its guarantees.

Many of Minsheng’s challenges have undoubtedly been taken on board by investors. The bank, which has a market cap of $ 25 billion, trades in Hong Kong for just 0.2 times reported net assets, the lowest level of the Bloomberg Index of global banks. JPMorgan Chase & Co., the largest US bank by market value, has a multiple of 1.94.

Credit markets suggest Minsheng will weather the housing downturn without a cash crunch. The bank’s one-year negotiable certificates of deposit have an indicated yield of around 2.77%, just a few basis points higher than its peers, notably China Merchants Bank Co. and Ping An Bank Co. Minsheng is expected to yield. benefit if Chinese policymakers continue their recent easing. brakes on the real estate sector, a movement that has already allowed the bank’s action to stabilize in recent weeks.

Minsheng has based his future growth on retail banking and small business lending – areas that, for now at least, are supported by the Xi government. The bank hired several senior executives from competitors to lead its transition.

Yet Minsheng faces an uphill battle to become a formidable player in consumer banking. Its retail clientele had 2,000 billion yuan in assets in September, compared to 3 trillion yuan at Ping An Bank and 10,000 billion yuan at China Merchants Bank.

Meanwhile, short sellers are betting Minsheng will face more unrest as China’s developer crisis continues. Bets against the bank stand at 8.6% of shares outstanding, nearly double the level of the second shortest company in the Bloomberg Index of Global Banks, according to data from IHS Markit.

The turning point for Minsheng could be a long way off, according to Chanson & Co.’s Shen.

“With the risk of growth from private developers, it will take at least three years for Minsheng to clean up bad debts,” Shen said.