ICBC fundraising worries investors

Bank's new bonds pull down stock market and highlight mainland lenders' need to raise capital

PUBLISHED : Thursday, 17 January, 2013, 12:00am
UPDATED : Tuesday, 23 January, 2018, 11:43am

The fundraising plans of Industrial and Commercial Bank of China (ICBC) cooled enthusiasm in the mainland stock market yesterday, as investors fretted about further capital raisings by lenders.

The Shanghai Composite Index slumped nearly 2 per cent in intraday trading as investors sold shares in smaller lenders including Bank of Beijing, China Citic Bank, China Minsheng Banking and Ping An Bank.

ICBC, the world's largest lender by market value, surprised the market by announcing on Tuesday night a plan to sell as much as 60 billion yuan (HK$74.12 billion) of tier-2 bonds. Smaller lenders are widely expected to follow suit to comply with new mainland capital requirements which took effect on January 1 this year.

Under the new rules, which are designed to comply with the Basel III requirements, "systemically important banks", such as ICBC, must have a minimum total capital adequacy ratio of 9.5 per cent by the end of 2013. The ratio will be increased by 0.4 percentage point a year for the following five years, reaching 11.5 per cent in 2018. For smaller banks, the total capital ratio requirement is 8.5 per cent this year and 10.5 per cent by 2018.

ICBC had a total capital adequacy ratio of 13.61 per cent at the end of September, exceeding the regulatory requirement.

The capital replenishment is aimed to "meet future demand" for the development of ICBC, as stricter capital calculations under the new rules are expected to reduce lenders' capital ratio, said Guo Tianyong, a professor at the Central University of Finance and Economics in Beijing.

Analysts at China International Capital Corp estimate the new rule will reduce ICBC's core capital adequacy ratio by 1.05 percentage points.

May Yan, an analyst at Barclays Capital, said a small number of banks might face capital shortages in the next three to four years, while those under imminent pressure, including China Merchants Bank and China Minsheng Banking, had already announced fundraising plans.

Mainland commercial banks issued 33 subordinated bonds last year and raised about 226 billion yuan. Among them, 19 bonds worth 166 billion yuan were sold in November and December, as lenders rushed to sell debt to avoid the restrictions of the new tightened capital rules.

Securities sold by banks other than common equity now have conditions including forced write-downs on principal or convertibility into common shares if the lender's core tier-1 ratio drops to 5.125 per cent or lower.

ICBC's new bond will be calculated as capital with reduced book value in the last five years of its maturity, from 100 per cent to 80 per cent, 60 per cent, 40 per cent and 20 per cent respectively in the following years.