Newbridge's bid to lift the bank's capital adequacy ratio is caught up in the non-tradable share reform For two years, buyout specialist Newbridge Capital had fought a high-profile battle to take management control of Shenzhen Development Bank (SDB), punctuated with arbitration requests. Now, the United States private equity firm's attempt to turn the weakest of the five listed mainland lenders around is again the focus of market watchers' attention, albeit for an unexpected reason. As a domestically quoted bank, SDB's capital adequacy ratio (CAR), at 3.14 per cent at the end of June, is woefully short of the regulatory requirement of 8 per cent. However, new capital raising has to wait until owners of its tradable and non-tradable shares agree on how all of SDB's shares can be floated publicly. The resurrected reform of non-tradable shares, which collectively make up 66 per cent of China's stock market capitalisation, requires owners of non-tradable shares to compensate ordinary shareholders who generally have paid more dearly for their freely traded shares. Newbridge's 17.89 per cent investment in SDB, completed only last year, and the mainland lender's unusual equity structure are a recipe for tough negotiations ahead, analysts say. Shan Weijian, Hong Kong-based managing director of Newbridge, who doubles as a director of SDB and other companies, has penned commentaries disputing the wisdom of the prevailing schemes of compensation which typically call for non-tradable shareholders to give away part of their holdings. Unlike the typical mainland-listed firm, which generally has only about 33 per cent of its shares on free float, about 72 per cent of SDB's shares are freely traded, thus the financial burden of compensating tradable-share investors will be large and borne by a smaller group of non-tradable-share owners. Acknowledging the bank's unique equity structure, SDB's new president, Jeffrey Williams, is optimistic shareholders will work out a compensation plan soon. 'We hope to get something done by the end of this year,' he said in an interview in Shenzhen this week, referring to plans for rights issues or share placements to domestic or international investors to boost the bank's CAR to about 4 per cent. The share sales will be complemented by retained earnings and subordinated debt offerings to expand the bank's capital base. SDB has undergone a massive management and balance sheet overhaul since Newbridge became its largest shareholder last year. Its new management has replaced 11 of the 18 city branch chiefs in the past six months as more skilled officials were put in charge, said Mr Williams. Each city branch, formerly operating like a little fiefdom, now has a credit officer who reports to head office. New credit, finance and technology chiefs were brought in at the headquarters and chief credit officer Simon Lee, a Hong Kong banker who had served at Indosuez, American Express and Citic Ka Wah banks, arrived two months ago. Chief technology officer Bruce Sun Di, a former China Construction Bank official, once headed the department of information systems at California State University. A new independent unit was set up this year to 'form a tighter focus' on resolving non-performing loans (NPL), once managed at sub-branches, Mr Williams said. The 130-strong unit, headed by Wang Ji, a recruit from Shenzhen Commercial Bank, handles debt workouts and resolution through the legal system and sets policies on the identification and writing-off of bad loans. While mainland banks have widely resorted to restructuring loans to cover up NPLs - 27 per cent of SDB's 4.18 billion yuan of restructured loans at the end of June were actually overdue - the new unit focuses on cash collection. 'Since we set up the new NPL unit, our collections year on year have increased a lot,' Mr Williams said. 'But, more importantly, the proportion of cash collection as opposed to restructuring has increased a lot, well over half. 'Going forward, the profile is quite different from whatever the practice was in the past.'