3 reasons behind Chinese banks' rising exposure to trust assets revealed

The increase is a negative to their risk profiles.

According to Bernstein Research, the rising exposure to trust assets at the Chinese banks was brought about by 1) the desire to increase the mix of high-yielding assets, 2) the intent to circumvent loan quotas and LDR ceilings, andmost importantly

3) the need to ensure their wealth management product (WMP) complex complies by yearend with new regulations which limit exposures to non-standard credit assets (NSCAs) such as trust assets. As a result, banks have been transferring these assets from the WMPs directly onto their own balance sheets.

Here's more from Bernstein:

- Investors should expect more trust assets to be consolidated onto the balance sheet of the banks as they face pressure to comply with the new WMP regulations at year-end. This is especially the case at the smaller banks which, for the most part, are still in breach of the new regulations.

- We find it interesting that the new WMP regulations that were established to lessen default risk for WMP investors is weakening the risk profile of the originating banks, something we are not sure was the intention of the CBRC when they issued these new guidelines in March.

We view the increasing trust exposure among the banks (particularly the small and mid-sized banks) as a negative to their risk profiles. As a result, we continue to prefer the large banks over the small banks given their better risk profiles, higher capital ratios and stronger liquidity profiles.

- In our coverage group, Minsheng (5%), China Merchants Bank (4%) and CITIC (3%) have the highest balance sheet exposure to trust assets. The balance sheet exposure at the Big 4 banks and BOCOM is just 0-1%.