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Richard Latker

State Council approves lower than expected bailout package for lender

China will plough US$15 billion ($117 billion) into Industrial and Commercial Bank of China (ICBC) to rehabilitate its books and prepare it for a stock-market listing next year, state media reported yesterday.

The cash injection, funded from official foreign exchange reserves, will be used to retire bad debt and augment the lender's capital adequacy ratio to 6 per cent, Xinhua reported.

'ICBC has made tremendous contribution to the country's economic development and financial reform,' the Xinhua report said. 'However, due to historical reasons, ICBC has also amassed a relatively bigger risk exposure.'

Telephone calls to ICBC were not returned last night.

Analysts said they were surprised that the bailout package was not far larger.

Many have said that Beijing ultimately would need to spend US$35 billion to transform ICBC - the mainland's largest lender whose 20,000 branches control nearly 20 per cent of the nation's banking assets - into a world-class financial institution strong enough to warrant confidence from global portfolio investors.

The report said that after the state recapitalisation, the bank - one of China's Big Four state-owned commercial banks - would sell subordinated debt to further enhance its capital adequacy ratio to exceed the international standard of 8 per cent.

The bank's capital adequacy ratio stood at 5.52 per cent at the end of last year.

'In order to meet the demand of further reform and economic development, and after reviewing the reform results of the Bank of China and China Construction Bank, the State Council has decided to implement restructuring at ICBC.'

Beijing recapitalised two other Big Four lenders - Bank of China (BOC) and China Construction Bank (CCB) - with US$22.5 billion apiece in December 2003, in what was widely seen as test run for a broader bailout of the nation's banking sector, which is still foundering in a sea of bad debt after decades of mismanagement and dubious lending.

The bailouts succeeded in boosting capital adequacy ratios at the two banks  to about 8 per cent and reducing their NPL ratios to below 10 per cent.

China  is also rushing to shore up its banks before the sector opens to full foreign competition under World Trade Organisation guidelines at the end of next year.

ICBC's financial ailments are considerably worse than those at BOC or CCB, despite official efforts since 1999 to improve management and resolve its NPLs. At least 19 per cent of its lending portfolio is still categorised as non-performing.

'This one is the most exposed to state-owned enterprises, so its problems are the worst of the three,' Frank Gong, an economist for JP Morgan, told Reuters.

The State Council and other key government organs had been preparing a blueprint for a restructured ICBC since as early as 2001, observers said yesterday, but a cash injection was seen as too risky until the results of the BOC and CCB bailouts could be assessed.

All three banks are aggressively soliciting strategic investment from foreign banks, as they compete to become the first state-owned banks to list on international equity markets. The banks are willing to cede a certain measure of management control to foreign investors as a means of mitigating international concerns over corporate governance and anchoring institutional demand for shares during the public offerings.

ICBC hopes to launch a US$10 billion initial public offering next year.

Although ICBC is generally expected to place last in the listing race, both BOC and CCB have been besieged by a series of high-profile scandals in recent months involving billions of yuan in stolen or missing assets.

ICBC posted an 18 per cent rise in operating profits last year to 74.7 billion yuan, most of which was funneled into retiring NPLs.

It has serves more than 100 million consumers and 8.1 million corporate clients.

Lifeline

Bailout funded from official foreign exchange reserves

Analysts say it is less than half the amount needed

Rescue to get ICBC in shape for flotation next year



Mainland to inject $117b into ICBC