By early October there were 15 regional Chinese banks waiting for approvals to go public. Unable to list on the domestic A-share market, the lenders are turning to Hong Kong for capital instead.
One example is the Bank of Chongqing which began trading in Hong Kong on Wednesday after a $548 million IPO. Huishang Bank, another lender formed from 31 urban credit cooperatives in Anhui’s Hefei city priced its own offering this week as well, raising $1.2 billion (slightly below the $1.3 billion anticipated).
Everbright Bank, the banking arm of state conglomerate China Everbright, is already listed in Shanghai. Yet it too has got approvals to raise capital in Hong Kong and plans to sell as many as 120 million H shares. Analysts calculate the offering could raise more than $5 billion. That’s almost $6 billion in equity fundraising with the promise of more to come. So why the rush to market?
After a lending binge in the wake of the 2008 global financial crisis, Chinese banks are looking to replenish their capital. Take as an example China Merchants Bank, which raised Rmb27.5 billion ($4.5 billion) in a rights issue in Shanghai in September.
China’s banks must attract a total of Rmb1 trillion in new capital this year, Sheng Songcheng, chief of statistics at the People’s Bank of China told the China Daily. That’s the minimum required if they are to extend an estimated Rmb9 trillion in new loans while maintaining a capital adequacy ratio of 12%.
In the past China’s banks have tended to replenish capital organically through a combination of rapid earnings growth and paltry dividend payouts. But the stratagem is fraying. Profit growth continued to decline in the third quarter as the banks grappled with an increase in souring loans, as well as narrowing interest spreads. ICBC, the world’s biggest lender by assets, reported a mere 7.7% rise in third-quarter earnings last week – a significant slowdown from the 12.5% growth in the second quarter (bad loans increased by 30% on an annualised basis too).
Still, there is some good news for bankers. According to the 21CN Business Herald, the central bank will permit 20 lenders to sell up to Rmb300 billion in asset-back securities (ABS) by the end of June next year. That’s a big increase on the quota set for the pilot scheme, which stood at just Rmb50 billion when it was first introduced in 2011. By selling down some of the riskier assets in their loan books into asset-backed securities, the banks could free up more capital for lending.
As matters stand, securitised assets account for nearly 26% of the bond market in the US. In China the figure is less than 0.5%. “The general view on securitisation has been turning from fearful to rational,” the 21CN suggests. “It is obviously excessive in the US but obviously underdeveloped in China.”
The move isn’t going to be a quick fix for the more financially stretched of the banks, not least because the expanded scheme is tiny when measured against the Rmb130 trillion of assets at sector level.
More immediate relief could come from another source of funding: preferred shares. This asset class ranks above common stock in respect to dividend payments and asset liquidations but is generally fairly illiquid and carries no voting rights. Banks often issue preferred shares in times of stress – Goldman Sachs sold Warren Buffett’s Berkshire Hathaway $5 billion of preferred stock in late 2008 (it paid a hefty 10% fixed dividend and could only be bought back by Goldman at a 10% premium). Not surprisingly, common stockholders aren’t usually enthused by such arrangements, but their terms can attract capital during difficult times.
The securities regulator has said that it has been readying new rules for firms to issue preferred shares. Meanwhile local media expect banks to be the first sector to get access to the planned pilot programme on launch (although when and how big it will be remains to be specified).
It may be an important means of fundraising, mind you, given fund managers are becoming more cautious. The New York Times reckons demand for both the recent banking IPOs in Hong Kong was “lukewarm” and said it suggested “investors are concerned about how China’s financial system would cope with a potential deluge of bad debt that could swamp the country’s economy”.
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