Preferred shares rush expected

Lenders that meet regulator's tier-1 or core capital requirements will be allowed to issue preferred stock instead of selling common equity

PUBLISHED : Monday, 12 May, 2014, 2:58am
UPDATED : Monday, 12 May, 2014, 2:58am

A new regulation is likely to spur mainland banks to flood the market with preferred shares this summer as they flock to the fresh funding channel to replenish capital in order to satisfy Beijing's tougher capital adequacy requirements.

Banks that met the banking regulator's tier-1 or core capital requirements would be allowed to issue preferred shares, the China Banking Regulatory Commission said in a weekly briefing on April 18.

Preferred stock will allow banks to raise capital without selling dilutive common equity. The shares can be converted into common stock if capital ratios fall below a certain level.

"Preferred stock is a major funding channel for commercial banks to replenish their tier-1 capital and would help optimise commercial banks' capital structure," said Kelvin Leung, a Greater China banking and capital markets leader at accounting firm EY. "In addition, the lenders would seek capital through asset securitisation and issuing eligible tier-2 bonds.

"I do not see them coming to the equity market for now," he added, referring to low valuations of mainland banks and the relatively higher cost compared with issuance of preferred stocks.

Pudong Development Bank will be the first mainland bank to issue preferred shares. It has announced it will raise up to 30 billion yuan (HK$37.3 billion) in a private placement of preferred shares with up to 300 million shares sold to up to 200 investors.

Meanwhile, Agricultural Bank of China, one of the country's Big Four banks, plans to bolster its capital base with up to 80 billion yuan in preferred shares. Analysts expect more to follow.

"We expect the Big Four banks will follow suit and issue preferred shares at relatively low cost," BNP analyst Judy Zhang said. "We expect the funding cost of the preferred shares to be … much lower than its global peers' funding cost on preferred shares, 200 basis points above the yield of financial bonds issued by global peers."

As of the end of last year, Beijing-based Hua Xia Bank and Ping An Bank were still short of the regulator's new capital adequacy requirement.

Hua Xia's capital adequacy ratio stood at 9.88 per cent, while Ping An Bank's ratio was at 9.9 per cent.

In addition, Bank of Beijing, China Minsheng Bank, Industrial Bank, Pufa Bank and China Everbright Bank all had ratios just a little above the requirement and are expected to seek to boost their buffers, especially amid a steady rise in bad debts.

The mainland implemented tougher requirements on lenders' capital in January last year. Under the new rules, the capital adequacy ratio of "systemically important" banks - namely the Big Four - is required to reach 11.5 per cent by 2018, while other banks will need to reach 10.5 per cent by then.

A BNP report showed that, when write-offs were included, the gross non-performing loan ratio at all Hong Kong-listed mainland banks was up 12 per cent quarter on quarter in the first quarter of this year.