Weihai Bank will issue new shares to the investment platform under the Shandong municipal government to strengthen its capital buffer
<h4>Key Points:</h4>
<ul>
<li>Weihai Bank will place new shares to its hometown's municipal investment platform, raising approximately 1 billion yuan.</li>
<li>Against the backdrop of a slowing Chinese economy and a significant weakening of capital buffers, Weihai Bank has chosen to introduce local government funds for support.</li>
</ul>
Liang Wuren
Weihai Bank Co., Ltd. (9677.HK) received a significant gift from the local government at the end of the year, providing much-needed support for its balance sheet as it approaches the new year. However, the overall atmosphere surrounding this local bank cannot be described as festive.
On Christmas Eve, this bank listed in Hong Kong announced that its municipal investment platform, Caixin Assets, located in Weihai City, Shandong Province, has agreed to subscribe for approximately 328 million new shares at a price of 3.29 yuan per share. This pricing represents a premium of about 18% over the closing price on that day, and the transaction will inject approximately 1 billion yuan (about 140 million USD) into Weihai Bank.
On the surface, this share placement seems to be a &#34;vote of confidence,&#34; especially since new share issuances typically require discounts, yet the subscriber chose to invest at a premium. In reality, it resembles a financial lifeline. In other words, Weihai Bank is facing the dilemma of strengthening its balance sheet, and the local government has chosen to step in directly with a financial check to improve its solvency.
The new funds introduced to Weihai Bank are not for business expansion but rather to fill the already tight capital buffer. Its core Tier 1 capital ratio, which is the proportion of shareholder equity to risk-weighted assets, has significantly declined by nearly one percentage point year-on-year to 8.3% in the six months ending in June. Such a sharp deterioration in this key indicator of a bank's financial soundness is undoubtedly a warning signal.
Although Weihai Bank's core Tier 1 capital ratio remains above the regulatory minimum requirement, the gap compared to one of China's four major banks, the industry giant Industrial and Commercial Bank of China (1398.HK; 600398.SH), which stands at a high 13.9%, is quite pronounced.
Even more concerning is the alarming speed at which Weihai Bank is losing capital, which has placed heavy pressure on its profitability. In the first half of 2025, the bank's retained earnings—profits reinvested into the business—have nearly stagnated, while risk-weighted assets, primarily from loans, have expanded by nearly 10%. This widening gap indicates that while the bank's lending scale is rapidly growing, it has failed to generate sufficient profits to support its own development.
The predicament of Weihai Bank is a microcosm of China's large-scale small local banking system. Recently, these banks have become a tricky group in the eyes of investors and policymakers, with the root of the problem lying in the prolonged economic downturn. As China's economic growth slows, both consumers and businesses have become conservative about taking on new debt, leading to a depletion of loan demand.
For banks, this means that revenue growth from their core business has become more challenging. At the same time, the economic downturn has increased default risks, forcing lending institutions to be more cautious about their loan targets. A vicious cycle has formed under the interplay of various factors: to maintain asset quality, banks must tighten credit; however, once credit tightens, it further compresses new business opportunities, putting pressure on both revenue and profitability
The worsening situation is exacerbated by monetary policy factors. In order to boost the weak economy, the People's Bank of China has little choice but to continue lowering interest rates, which directly squeezes banks' net interest margins, that is, the gap between loan interest income and deposit interest expenses.
The net interest margin of WEIHAI BANK has narrowed from 1.8% a year ago to 1.65% in the first half of this year. Therefore, even though the bank's loan scale grew by about 9% year-on-year during the period, the increase in interest income was only 5.3%. As the interest margin continues to be eroded, the bank's ability to replenish capital through internal profits is increasingly limited. Moreover, as the banking industry's difficulties have become widely known, market investment appetite for bank stocks has weakened, making it equally difficult to turn to external private investors for funding.
This situation has also caused headaches for Beijing and provincial and municipal governments across the country that control most banks. The banking system is like the circulatory system of China's vast economy, crucial for supporting economic growth. What all levels of government least want to see is an industry crisis triggered by the collapse of local banks.
<h4>Under Currents</h4>
In a financial system filled with hidden pressures, the domino effect often comes quickly and violently. Even if just one small bank encounters problems, it can trigger a chain reaction, prompting depositors to withdraw funds from other institutions perceived as equally vulnerable. Therefore, the responsibility to support banks ultimately falls on the government.
The transaction involving WEIHAI BANK exemplifies the aforementioned dilemma, essentially equating to local governments injecting capital into banks under relatively generous conditions. However, this rescue model itself also has problems. It highlights the highly entangled relationship between local governments, regional economies, and banks. For a long time, local banks have been the main financing channel for local government projects and key supported enterprises. Once these borrowers encounter difficulties during economic downturns, the banks' balance sheets will be the first to suffer.
Government-led bank rescue actions, such as the recent arrangement for WEIHAI BANK, are often not only aimed at maintaining financial stability but also at protecting intertwined local interests. More importantly, such intervention measures do little to address the core operational issues of the banks themselves; they can only provide temporary relief and are not a long-term solution.
For investors, the signal is quite clear. The premium paid by Xunxin Asset is less a recognition of value than a necessity, as this is a transaction driven by policy rather than market rationality. It reveals a significant gap between the valuation of banks under market pricing and the price local governments are willing to pay to maintain stability. Although this capital injection may temporarily alleviate urgent needs, it does not change the fundamental predicament: the continued narrowing of interest margins, uncertain economic recovery prospects, and a severe credit environment.
Even though WEIHAI BANK's situation appears precarious, it is still not the worst compared to the increasing number of local banks falling into deeper difficulties. In a recent case, the municipal government of Shenyang in Northeast China privatized Shengjing Bank last month to restructure this troubled bank out of the public eye.
The capital gift received by WEIHAI BANK on Christmas Eve clearly reminds the market that beneath the surface stability of China's financial system, pressures are continuing to accumulate, particularly evident in smaller banks with insufficient business diversification
Although the state-led capital support model can alleviate the financial pressure on banks to some extent, it also harms the interests of small and medium-sized private investors by diluting equity.
As expected, since the announcement of the share placement, WEIHAI BANK's stock price has fallen, with the current price-to-sales ratio (P/S) at about 1.7 times, lower than Industrial and Commercial Bank of China's 2.5 times. Another local bank, Huishang Bank (3698.HK), has an even lower price-to-sales ratio of only about 1.07 times, reflecting that investor interest in such bank stocks remains sluggish

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WEIHAI BANK will issue shares to an investment platform under the Shandong municipal government, raising approximately 1 billion yuan to strengthen its capital buffer. The shares will be subscribed at a price of 3.29 yuan per share, representing a premium of about 18%. Although the core Tier 1 capital ratio remains above regulatory requirements, it has significantly declined to 8.3%, indicating that its financial stability is under pressure. The new funds will primarily be used to improve solvency rather than for business expansion

With local government capital injection, WEIHAI BANK's capital pressure is revealed