Weihai Bank gets government-led year-end capital gift, highlighting its troubles

The regional lender will sell new shares to a municipal investor in its hometown in Shandong province to shore up its capital cushion

Key Takeaways:

• Weihai Bank will raise about 1 billion yuan by selling new shares to an investment vehicle owned by municipal organizations in its hometown
• The move comes after the regional lender’s capital cushion weakened substantially in a slowing Chinese economy

By Warren Yang

Weihai Bank Co. Ltd. (9677.HK) has received a generous year-end gift from its municipal government, providing a needed boost to its balance sheet heading into the New Year. The mood around the regional lender, however, is far from festive.

On Christmas Eve, the Hong Kong-listed bank said that Caixin Asset, an investment vehicle owned by municipal organizations in its hometown of Weihai, in East China’s Shandong province, agreed to purchase about 328 million new shares for 3.29 yuan each. The price represented an 18% premium over the bank’s closing share price that day, and the deal will inject roughly 1 billion yuan ($140 million) into the bank’s coffers.

On the surface, the share sale may look like a vote of confidence, especially since the buyer is paying a premium, instead of the discounts that usually come with such new share issues. But in reality, it’s a financial lifeline. In effect, the bank is struggling to augment its balance sheet, and its hometown is writing a big check to improve its solvency.

Weihai Bank will use the new capital to shore up its dangerously depleted capital buffers, rather than for growth. The ratio of its core Tier 1 capital, essentially its equity, to its total risk-weighted assets, plummeted by nearly a full percentage point to 8.3% in the six months to June compared with a year earlier. This is a key measure of a bank’s financial health, so the sharp deterioration clearly is a red flag.

While Weihai Bank’s core Tier 1 capital ratio is still above the regulatory minimum, it pales in comparison to the 13.9% for sector giant ICBC (1398.HK; 600398.SH), one of China’s national “big four” lenders.

More alarmingly, Weihai Bank’s capital erosion occurred at a startling speed, putting intense pressure on its profitability. In the first half of 2025, its retained earnings, or profit reinvested into its business, stagnated while its risk-weighted assets, primarily loans, swelled by nearly 10%. This widening gap signals that the bank is expanding its loan portfolio without generating the necessary profit to support its business growth.

Weihai Bank’s predicament is a microcosm of the profound challenges facing China’s vast network of small regional banks, which lately are becoming a troublesome bunch for both investors and policymakers. The root cause is an economy mired in a prolonged slump. As China’s economic growth falters, both consumers and businesses are hesitant to take on new debt, drying up demand for loans.

For banks, this translates directly into difficulty boosting revenue from their core business. Simultaneously, the economic downturn increases the risk of defaults, forcing lenders to become more cautious about who they lend to. All of these factors create a vicious cycle. To protect asset quality, banks must tighten credit. But that further constrains their ability to generate new business, pressuring both their revenue and profits.

Compounding these problems is monetary policy. To stimulate the flagging economy, China’s central bank has little recourse but to keep cutting interest rates. This squeezes banks’ net interest margins, the difference between the interest they earn on loans and the interest they pay to depositors.

Weihai Bank’s net interest margin contracted to 1.65% in the first half of this year from 1.8% a year earlier. Consequently, even as its loan book grew about 9% year-on-year during the six-month period, its interest income rose by a far smaller 5.3%. With margins thinning, generating internal capital through earnings is becoming increasingly difficult. Turning to external private investors to raise funds is also not easy, as the sector’s well-publicized troubles have dampened market appetite for bank stocks.

This creates a headache for Beijing and the many provincial and municipal governments across China that control most of the nation’s lenders. A healthy banking system is the circulatory system of China’s vast economy, essential for funding its growth. The last thing these governments want is a crisis in the sector triggered by regional bank failures.

Underlying stress

In a financial system filled with underlying stress, the dominoes can fall quickly. The failure of even a single small bank can spark contagion, prompting depositors to flee from other weak institutions they believe could fall next. So, the onus falls on the government to preemptively support weak banks.

The Weihai Bank deal exemplifies this predicament, basically equating to a government-provided capital injection on very generous terms to the lender. But this rescue model is itself problematic. It highlights the deep entanglement of local governments, regional economies and their banks. Regional banks have historically been conduits for funding local government projects and favored businesses. When those borrowers struggle in an economic downturn, their balance sheets suffer directly.

And government-led bank bailouts, like this latest one for Weihai Bank, are often about protecting intertwined local interests as much as they are about ensuring financial stability. Furthermore, such interventions do little to address banks’ core operational deficiencies. They are a stopgap solution, not a permanent one.

For investors, the message is clear. The premium paid by Caixin Asset is less a signal of value and is more out of necessity, a transaction dictated by policy rather than market prudence. It exposes the big gap between the bank’s market-determined valuation and the price the local government is willing to pay to maintain stability. While the capital infusion may stave off immediate danger, it does not alter the grim fundamentals: narrowing margins, an uncertain economic recovery and a challenging credit environment.

While Weihai Bank’s situation looks shaky, it’s still better than a growing number of other regional lenders that have run into even bigger difficulties. In one of the most recent cases, the municipal government in the Northeast city of Shenyang privatized the local Shengjing Bank last month to overhaul the problem-plagued lender out of the public eye.

The Christmas Eve capital gift for Weihai Bank is a stark reminder that significant strains are building beneath the surface of China’s financial system, particularly among smaller, less diversified regional lenders. While the state-led capital support model relieves some financial pressures on these banks, it also hurts small private investors by diluting their stock.

Unsurprisingly, Weihai Bank shares have dropped since the share sale announcement and now trade at a price-to-sales (P/S) ratio of 1.7, below 2.5 for ICBC. Huishang Bank (3698.HK), another regional lender, trades at an even lower ratio of 1.07, reflecting lack of investor enthusiasm around these stocks.

Policymakers are caught in a bind, forced to choose between allowing market discipline to run its course and orchestrating recurring bailouts that delay necessary restructuring. As the economy continues to sputter, the pressure on these regional banks will only intensify. The gift to Weihai Bank is keeping the lights on for now. But it does nothing to illuminate a clear path forward for China’s troubled regional banking sector.

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