Mainland banks’ preferred shares have appeal for analysts

Preferred shares issued by mainland banks look increasingly attractive as the lenders seek to shore up capital at a time of declining performance across the sector, analysts say.

The banking regulator in April gave approval for banks to issue preferred shares, a form of hybrid security with a fixed rate of return. The capital raised can be factored into the banks' tier-one capital, which complies with international banking practices known as Basel III.

As a wave of the shares are expected to be issued in the last few months of the year, Fitch Ratings this week questioned whether a solid appetite would exist as they flooded the market.

"Planned issuance of Basel III capital securities by China's largest commercial banks through to the end of 2014 could be sizeable and, as a result, may face a challenging market," Fitch said in a statement, noting that the five biggest banks were expected to issue up US$20 billion in preferred shares or subordinate debt by the end of the year.

The securities pose some problems. They can only be priced in yuan and the same restriction applies to the dividends. The preferred shares can only be placed with 200 investors, greatly restricting the market.

However, as the outlook for banks' common equity shares is threatened by rising bad loans and an overall slowdown in the sector, the relatively high fixed yields on the preferred shares are becoming much more attractive.