Quest for capital intensifies for Chinese banks

With mainland lenders' earnings growth tipped to slow against a backdrop of raised capital adequacy needs, funding pressures will grow

PUBLISHED : Friday, 10 May, 2013, 12:00am
UPDATED : Friday, 10 May, 2013, 5:29am

Mainland banks have a huge capital gap that they will be unable to rely on profits to fill but will have to tap the markets more heavily instead in the next few years.

The banks, the lending business of which contributes the bulk of their earnings, face pressure to meet raised capital adequacy requirements under regulations that took effect this year, accounting giant PwC said in a report yesterday.

Compared with the previous requirement of 8 per cent, banks are required to have a minimum capital adequacy ratio (CAR, the ratio of a bank's capital to its risk-weighted assets) of at least 10.5 per cent - 11.5 per cent for larger banks. They must meet their targets by 2016.

At the 10 largest mainland banks, the CAR climbed 0.65 percentage point on average last year to 12.91 per cent. They replenished capital with 84.5 billion yuan (HK$106.7 billion) of share offerings, 176.7 billion yuan of subordinated debt issues and, most importantly, the bulk of their 965.6 billion yuan of net profit last year, PwC said.

"Their current CAR situation is OK, but with further business expansion, they will increasingly feel the pinch from capital pressure," PwC partner Richard Zhu said.

Their current CAR situation is OK, but with further business expansion, they will increasingly feel the pinch from capital pressure
PwC partner Richard Zhu 

Central bank officials have given estimates of the size of the necessary capital top-up. Sheng Songcheng, head of the statistics division at the People's Bank of China, said an additional 1 trillion yuan of capital would be needed if banks made between 8.5 trillion and 9 trillion yuan in new loans this year. Liu Shiyu, a PBOC vice-governor, said last week the capital gap of the five largest banks would reach 40.5 billion yuan by next year and 1.66 trillion yuan by 2017.

Zhu said: "Banks will be unable to basically count on profits to boost capital, as their profit growth is set to slow down in the coming few years."

The 10 largest lenders posted a 16 per cent increase in net profit last year, significantly lower than the 28 per cent in 2011. Earnings growth is widely expected to further slow as the mainland economy gears down, losses from bad loans rise and steps towards interest rate liberalisation dent lending profitability.

Liu has repeatedly said the state's holdings in major lenders were too high, indicating that Central Huijin, the state shareholder in the banks, is unlikely to subscribe heavily to new share offerings from banks.

Mainland banks massively raised funds in capital markets in 2011 after the lending spree following the 2008-09 global financial crisis weakened their financial strength. The thirst for capital scared investors, causing the Shanghai Composite Index to slump about 20 per cent to become one of the worst performers that year.

Since then, mainland authorities have been encouraging banks to issue bonds. Industrial and Commercial Bank of China announced in January it would sell 60 billion yuan worth of subordinated debt. ICBC president Yang Kaisheng said: "Replenishing capital is something banks must do sooner or later. The earlier, the better."

Banks are also looking for opportunities in the Hong Kong stock market. Bank of Beijing has announced plans to list in Hong Kong. Guangfa Bank aims to launch its US$5 billion dual listing in Shanghai and Hong Kong late this year. Bank of Shanghai, 8 per cent owned by HSBC, was preparing its potential US$2 billion float, bankers said.