Bank of China

Agricultural Bank in for US$40b boost

PUBLISHED : Monday, 06 August, 2007, 12:00am
UPDATED : Monday, 06 August, 2007, 12:00am

The People's Bank of China plans a pre-listing capital injection of US$40 billion into the Agricultural Bank of China, the only one of the big four state-owned commercial banks that remains unlisted, according to a mainland newspaper.

The injection, which will be made through the central bank's investment unit, Central Huijin Investment, will amount to the biggest bailout of the big four state banks and will raise Agricultural Bank's capital adequacy ratio to 8 per cent, the minimum required ratio for commercial banks in the mainland, the Economic Observer reported on Saturday.

Citing official sources, the report said the cash injection would mark a major step in Agricultural Bank's restructuring plan and was a precursor to allowing the debt-laden and weakest of the big four banks to eventually be listed.

The US$40 billion would come via the country's yet-to-be-formed overseas investment agency, China State Foreign Exchange Investment, that would take over Central Huijin and manage part of the mainland's US$1.33 trillion foreign exchange reserves, the report said.

China's cabinet and parliament have approved the issue of 1.55 trillion yuan of special bonds to finance the setting up of the agency, which would in turn use the proceeds to buy foreign exchange reserves from the central bank.

Citing unidentified sources, the Economic Observer said the future foreign investment agency would use US$65 billion to buy out Huijin from the People's Bank of China, and Huijin would conduct the planned US$40 billion injection.

Agricultural Bank, the biggest lender for the mainland's 800 million farmers, is the only big state-owned commercial lender yet to be bailed out by the government.

Xinhua news agency announced earlier this year that the Agricultural Bank bailout would amount to 900 billion yuan, including a US$25 billion to US$30 billion capital injection by Huijin and up to 660 billion yuan in bad loan subsidies.

Beijing has injected US$60 billion into the country's other three banking giants - US$22.5 billion each for Bank of China and China Construction Bank, and US$15 billion for Industrial and Commercial Bank of China.

Although the planned US$40 billion bailout will be the biggest capital injection for the big four, it is widely expected that it will still not be enough, given Agricultural Bank's huge portfolio of non-performing loans.

The Beijing-based lender's NPL ratio stood at 23.43 per cent as at the end of last year, with total NPLs of 735.6 billion yuan.

The average sour loan ratio in the country's commercial banks was 7.5 per cent at the end of 2006.

As a result, the PBC and the Ministry of Finance might also be required to take over a large portfolio of the sour loans, said the report, citing people familiar with the situation.

In the case of the mainland's largest lender the Industrial and Commercial Bank of China, 246 billion yuan of bad loans that were classified as Category 5 or total loss were transferred to the Ministry of Finance and another 459 billion yuan of Category 4 or suspicious loans were acquired by the four state-owned asset management companies.

Big bailout

The move will lead to the listing of the Agricultural Bank of China

The amount of special bonds Beijing will issue to set up the China State Foreign Exchange Investment 1.6tr yuan