Bailout sets up key banks for listing
US$45b injection for two of mainland's Big Four will help clean up bad loans
The mainland government's cash bailout of two of its Big Four state banks will clear the way for their eventual partial privatisation and allow them to operate on a commercially viable basis, according to analysts.
The US$45 billion cash injection - taken from the country's foreign-exchange reserves and completed at the end of last year but announced only yesterday - into the Bank of China (BOC) and China Construction Bank (CCB) will substantially help in the clean-up of their historical bad loans, made when state banks were directed to lend as a matter of government policy.
Spokesmen for both the BOC and CCB yesterday did not reveal how the fresh funds would be used. Each bank will receive US$22.5 billion.
Moody's Investors Service banking analyst Yen Wei said the capital could go partly towards cutting their non-performing loan (NPL) ratios to less than 10 per cent and partly towards boosting their capital-adequacy ratio (CAR) to higher than 8 per cent.
This would make the two banks eligible for stock-market listings, which would be a source of additional capital and make them accountable to external shareholders, Mr Yen said.
CCB's bad-loan ratio stood at 11.92 per cent at the end of September last year, while its CAR was 6.91 per cent at the end of 2002. BOC's NPL ratio was 18.07 per cent at the end of September and its CAR was 8.2 per cent at the end of 2002.
'The driving reason for the recapitalisation is to fix up banks' balance sheets in advance of listings later this year or in 2005,' UBS chief Asian economist Jonathan Anderson said. 'BOC and CCB have been the most active in preparing for a listing, and thus were presumably first in line for new funds.'
The market expects CCB to tap at least US$5 billion from an overseas stock flotation, while BOC has spared no time in replenishing its capital base.
After floating its Hong Kong subsidiary to raise US$2.66 billion in 2002, the bank made a speedy sell-down of its Hong Kong arm for US$1.89 billion last month.
Analysts expect the other two Big Four state banks - the Industrial and Commercial Bank of China and the Agricultural Bank of China - to also receive a cash injection, possibly in 2006 and before the opening of the sector to foreign competition in 2007.
HSBC economist Qu Hongbin said: 'The cash injection means a lot to the two banks. Without a massive fiscal bailout, it would take [the Big Four state banks] 10 years to reduce their NPL ratios to less than 15 per cent by themselves.'
Fox-Pitt, Kelton banking analyst Sunil Garg said the bailout was the first step in the recapitalisation process. '[China banking regulatory chief] Liu Mingkang said they would first clean up the banks' balance sheets, let them bring in strategic investors, [followed by] stock flotations,' he said.
Mr Yen said this would be the last bailout for the two banks, but it had opened the way for them to look for fund-raising alternatives.
Despite previous rescue attempts, the Big Four are still riddled with two trillion yuan worth of bad loans.
