Mainland China banks to sell stock to bolster capital

Large mainland banks poised to issue preferred shares to help comply with new capital rules

PUBLISHED : Wednesday, 02 April, 2014, 5:45am
UPDATED : Wednesday, 02 April, 2014, 5:45am

Industrial and Commercial Bank of China and its competitors are poised to issue preferred shares this year to shore up finances as slowing profit growth curbs their ability to retain earnings as capital.

ICBC, China Construction Bank, Agricultural Bank of China and Bank of China said in the past week they were preparing to sell the stock as they reported a combined 12 per cent increase in profit last year, down from 15 per cent in 2012.

Preferred stock, available under a trial approved by regulators last month, permits 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.

China introduced stricter capital requirements for banks in January last year, posing another challenge for an industry facing slower loan growth and rising bad debts amid more competition and interest-rate deregulation.

The four biggest lenders will face a capital shortfall of US$87 billion under the new rules by 2019, Mizuho Securities Asia estimates.

"Banks might have to come to the market for equity-raising or they will have to restrict their loan growth in the next one or two years," said Edmond Law, an analyst at UOB Kay Hian (Hong Kong). "With the preferred share issuance, the problem will ease. That should minimise the market's concerns and should be positive for stock valuations."

The Hong Kong-traded stock of the four biggest banks fell by an average of 8.2 per cent this year amid weaker earnings prospects and rising loan delinquencies. The shares were valued at an average 0.85 times net assets, or book value, the lowest level since Agricultural Bank's initial public offering in 2010.

ICBC, the world's most profitable lender, reported last week a 10 per cent increase in last year's net income, the slowest pace since it was listed in 2006.

Construction Bank said profit growth rose 11 per cent, while Agricultural Bank's expansion slowed to 15 per cent. Bank of China's 12 per cent profit increase beat estimates as overseas lending rose.

The four banks wrote off and sold about 51 billion yuan (HK$64 billion) of bad debt, more than double that in 2012. The total was the most since at least 2009.

Declining profit growth at the biggest lenders curbs their ability to retain earnings to fulfil capital requirements. Under rules that took effect last year, systemically important banks need to have a minimum tier-1 ratio of 9.5 per cent, with overall buffers of 11.5 per cent before the end of 2018, according to the China Banking Regulatory Commission.

The nation's four biggest lenders are facing a combined shortfall of 538 billion yuan in common equity tier-1 capital by 2019 under the new requirements, Jim Antos, an analyst at Mizuho, wrote in a March 25 report.

The China Securities Regulatory Commission widened banks' options to manage their capital when it issued on March 22 rules for a trial allowing members of the Shanghai Stock Exchange 50 A-Share Index to issue preferred shares. Banks account for 40 per cent of the index.