Merchants Bank cash call sparks sector sell-off in China

Regulator's approval of lender's 20b yuan fundraising plan prompts investor concerns that more mainland banks may follow suit

PUBLISHED : Thursday, 25 July, 2013, 12:00am
UPDATED : Tuesday, 23 January, 2018, 11:45am

The shares of mainland banks came under pressure yesterday amid fears of a flood of equity fundraisings.

Earlier this week, the China Securities Regulatory Commission approved for the first time this year a bank's equity capital raising plan.

It's likely we'll see more fundraising attempts by mainland banks in the next two quarters. Capital constraints are prevalent in all Chinese banks as a result of their capital-consuming model of development
Guo Tianyong, Beijing's Central University of Finance and Economics

China Merchants Bank, the mainland's sixth-largest lender by assets, said on Tuesday it would issue about 3.07 billion new A shares.

Mainland banks faced a liquidity crunch late last month, with interbank lending rates soaring to record highs.

Merchants Bank's rights issue, estimated to raise 20 billion yuan (HK$25.2 billion), was long-awaited, with the bank having announced the plan in 2011.

"It's likely we'll see more fundraising attempts by mainland banks in the next two quarters," said Guo Tianyong, the head of the China banking research centre at Beijing's Central University of Finance and Economics. "Capital constraints are prevalent in all Chinese banks as a result of their capital-consuming model of development."

But an analyst with a leading mainland investment bank said further equity capital raisings by banks were unlikely to happen this year as the necessary procedures were time-consuming.

The analyst added there was nothing on the horizon likely to boost the share performance of banks in the short term, with their prospects dimmed by an increase in bad loans.

Shares of Merchants Bank fell 1.45 per cent to 10.90 yuan in Shanghai yesterday, while the H shares lost 1.18 per cent to HK$13.38 in Hong Kong.

The A shares of China Minsheng Banking fell 1.97 per cent, while China Citic Bank lost 1.94 per cent. The benchmark Shanghai Composite Index slid 0.52 per cent.

According to ChinaScope Financial, a Hong Kong-based research firm, mainland banks need to raise US$5 billion to US$10 billion over the next two years to keep capital ratios at current levels.

The profitability of mainland banks depends on the loan business. The lenders enjoy the fat spread between the interest rate they charge borrowers and what they pay on deposits. Small banks have been aggressive in doling out loans to compete with the state-controlled big lenders, and the capital-consuming nature of lending has eroded their financial strength.

Merchants Bank's core capital adequacy ratio stood at 8.49 per cent at the end of last year, lower than the regulatory requirement of 8.5 per cent, for the third consecutive year. The ratio was 8.13 per cent at Minsheng Bank. At Citic Bank, it was 9.35 per cent.

If the rights issue of Merchants Bank is completed by the end of this year, its tier-one ratio - a core measure of a bank's financial strength - will be lifted by 126 basis points to 9.28 per cent, and its return on equity will be diluted by 137 basis points to 20 per cent, according to Katherine Lei, an analyst at JP Morgan.

Guo said loan growth in the first half of this year probably pressured banks' capital ratios and that the cash squeeze last month might have made lenders keener to tap capital markets.

New loans extended by mainland banks in the first half of this year totalled 5.08 trillion yuan, 221.7 billion yuan more than in the same period last year.

Additional reporting by Ray Chan