Banking & Finance

Capital punishment

After a lending binge, banks signal need for new equity

Capital punishment

Tactical withdrawal: investors punished Bank of China's stock

A Bank of China (BOC) announcement in late November that it was “actively studying” ways to top up its capital base seems to have spooked shareholders.

Apart from confirming that the bank was going to make a cash call, the statement was short on details. It did not mention how much money was needed, nor did it specify a timetable. The lack of clarity only added to the disquiet.

But if the bank was being vague, investors were far more transparent in their response. Within three days of the announcement BOC’s Hong Kong shares were down 14%, eradicating nearly all of the gains made over the previous two months.

Behind the scenes, Bank of China is already negotiating with investment banks on how best to arrange a share sale that could be as large as $15 billion, reports Reuters. If the deal goes ahead, it will be the first of China’s four largest state-owned banks to raise cash in response to tougher regulatory standards on capital adequacy.

CBRC, the banking sector regulator, is making sure that banks have enough money put aside as a buffer when some of the Rmb8.92 trillion ($1.31 trillion) worth of new loans made this year inevitably turn sour.

The focus is on the minimum capital adequacy ratio, which currently stands at 10%.

That’s a requirement that several joint stock banks fail to meet. And even banks that are currently above the minimum 10%, such as Bank of China, may need more capital if they are to continue growing their businesses over the next few years.

In order to adhere to the new requirements and sustain loan growth, analysts say that China’s 11 largest listed banks need at least an additional Rmb300 billion.

Many of Bank of China’s smaller competitors are either in the process of raising capital, or have already done so. Minsheng Bank, China’s seventh largest lender, recently raised $3.9 billion in a Hong Kong IPO.

Other banks are using rights issues: China Merchants Bank expects to raise up to Rmb22 billion by tapping its existing shareholders and Fujian-headquartered Industrial Bank has also announced a Rmb18 billion rights offering.

The demand for hundreds of billions of yuan will definitely stretch the markets. Even if there is enough capital in the system to satisfy these needs, investors may be reluctant to hand it over. A jaundiced response to the most recent cases of a flurry of Chinese property developer IPOs in Hong Kong demonstrates that investors can become tired of companies from the same sector continually asking for cash.

And some analysts think that injecting capital into the sector will only postpone problems.

After the banks raise the money they need, they will continue to expand their loan portfolio, albeit probably at a slower rate than this year. Once they dish out another slew of loans, they could find themselves back in the same situation as they are today.

“If China Merchants Bank and Industrial Bank are successful, they can guarantee capital needs for the next two or three years. But, later, new refinancing needs will arise,” brokerage Guotai Junan told 21CN Business Herald.

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