Not a good time for banks to raise funds
By Zhang Fengming |
June 22, 2010, Tuesday
|
Print Edition
Print Edition
WHEW! I'm glad we unloaded our banking shares," Joe Jiang, a marketing manager with a Shanghai-based funds management company, said of the recent stock market slump.
His bitter attitude, shared by many other institutional investors, bodes ill for China's banks. The banks, drained of funds by aggressive lending the past year, are now looking to raise capital through share sales or debt issues. Some are having to pare back their offerings.
"More banks are expected to join the capital-raising queue," said She Minhua, a Haitong Securities Co analyst. "This will be a key year for banks to raise capital."
Banks in China extended a record 9.59 trillion yuan (US$1.4 trillion) of new loans in 2009, nearly double the government's 5 trillion yuan target. Many of those loans fed into a housing market bubble that the government is now resolved to deflate. Banks have been told to curtail property lending and to raise the amount of money they are required to keep in reserves. That's put the jitters into investors.
Banks are now starved for funds just when investors seem to have lost their appetite to buy. The Shanghai Composite Index has plunged 22 percent this year, the worst performer among the world's 10 biggest equity markets. Real estate and banking shares have led the decline.
"You know what?" said Jiang, who asked that his management company not be identified. "Many in the fund management industry leave work on time at 6pm every day. That was unheard of a year ago when the buying frenzy was on. Why do they leave so early now? They've no products to sell amid this bearish sentiment."
But banking shares worldwide have come under selling pressure since the Greek debt crisis threw new light on the amount of sovereign debt held by banks. Although Chinese banks may not be directly exposed to European debt, fears of a renewed recession in Europe could have an impact on the export-dependent Chinese economy.
Need to raise
Bearish times or not, Chinese banks have no choice but to replenish their drained coffers. The China Banking Regulatory Commission has already warned that it will curtail banks' expansion and limit their operations if they fail to meet a capital adequacy ratio requirement now set at 11 percent for China's major state-owned banks.
China's big five banks plan to raise capital this year, whether through rights offers, initial public offerings or bond sales. Some smaller banks also have unveiled plans to raise funds. But the amounts the banks were initially eying may be pie in the sky.
On June 6, Shanghai-based Bank of Communications, China's fifth-largest lender, said it was cutting its rights issues in Shanghai and Hong Kong to 33.1 billion yuan from 42 billion yuan announced in February. Qian Wenhui, an executive vice president of the bank, cited "market conditions."
Stephen Long, managing director at Moody's Investors Service, said the BoCom decision was evidence that China's banking re-capitalization process will continue despite a market slump.
"While the sheer size of these transactions creates a degree of execution risk given the potential to saturate the market with Chinese bank stocks, the banks have clear targets for regulatory capital ratios and our base case remains that they will aim to complete their planned transactions even if the deal size is smaller than originally planned," he said in a research note on June 14.
The Agricultural Bank of China, the last of the big five to go public, still plans an initial public offering this year through a dual listing in Shanghai and Hong Kong. It could be the biggest IPO in the world. The current IPO record is held by Industrial and Commercial Bank of China, which raised US$22 billion in a 2006 share sale.
ABC, the second-largest by assets and the biggest by customer base, had originally planned to raise US$30 billion but is now expected to scale that back to as low as US$20 billion. It plans to sell as many as 22.24 billion yuan-backed Class A shares in its IPO in Shanghai and another 25.4 billion shares in Hong Kong. The only uncertainty now rests on the issue price.
"Unfortunately, the sale comes amid bearish sentiment in the markets," Hua Meiyu, an investment manager at a Chinese insurer, said on June 4 when ABC issued its preliminary prospectus.
On the next trading day after the prospectus was released, the Shanghai Composite dived 1.6 percent.
Bank of China has already started subscription of its 40 billion yuan worth of bonds convertible into yuan-backed A shares.
BOC also hoped to complete its new H-share issue, the other component of its fund-rasing plan, by the end of this year, said Li Lihui, its president, in May.
His bitter attitude, shared by many other institutional investors, bodes ill for China's banks. The banks, drained of funds by aggressive lending the past year, are now looking to raise capital through share sales or debt issues. Some are having to pare back their offerings.
"More banks are expected to join the capital-raising queue," said She Minhua, a Haitong Securities Co analyst. "This will be a key year for banks to raise capital."
Banks in China extended a record 9.59 trillion yuan (US$1.4 trillion) of new loans in 2009, nearly double the government's 5 trillion yuan target. Many of those loans fed into a housing market bubble that the government is now resolved to deflate. Banks have been told to curtail property lending and to raise the amount of money they are required to keep in reserves. That's put the jitters into investors.
Banks are now starved for funds just when investors seem to have lost their appetite to buy. The Shanghai Composite Index has plunged 22 percent this year, the worst performer among the world's 10 biggest equity markets. Real estate and banking shares have led the decline.
"You know what?" said Jiang, who asked that his management company not be identified. "Many in the fund management industry leave work on time at 6pm every day. That was unheard of a year ago when the buying frenzy was on. Why do they leave so early now? They've no products to sell amid this bearish sentiment."
But banking shares worldwide have come under selling pressure since the Greek debt crisis threw new light on the amount of sovereign debt held by banks. Although Chinese banks may not be directly exposed to European debt, fears of a renewed recession in Europe could have an impact on the export-dependent Chinese economy.
Need to raise
Bearish times or not, Chinese banks have no choice but to replenish their drained coffers. The China Banking Regulatory Commission has already warned that it will curtail banks' expansion and limit their operations if they fail to meet a capital adequacy ratio requirement now set at 11 percent for China's major state-owned banks.
China's big five banks plan to raise capital this year, whether through rights offers, initial public offerings or bond sales. Some smaller banks also have unveiled plans to raise funds. But the amounts the banks were initially eying may be pie in the sky.
On June 6, Shanghai-based Bank of Communications, China's fifth-largest lender, said it was cutting its rights issues in Shanghai and Hong Kong to 33.1 billion yuan from 42 billion yuan announced in February. Qian Wenhui, an executive vice president of the bank, cited "market conditions."
Stephen Long, managing director at Moody's Investors Service, said the BoCom decision was evidence that China's banking re-capitalization process will continue despite a market slump.
"While the sheer size of these transactions creates a degree of execution risk given the potential to saturate the market with Chinese bank stocks, the banks have clear targets for regulatory capital ratios and our base case remains that they will aim to complete their planned transactions even if the deal size is smaller than originally planned," he said in a research note on June 14.
The Agricultural Bank of China, the last of the big five to go public, still plans an initial public offering this year through a dual listing in Shanghai and Hong Kong. It could be the biggest IPO in the world. The current IPO record is held by Industrial and Commercial Bank of China, which raised US$22 billion in a 2006 share sale.
ABC, the second-largest by assets and the biggest by customer base, had originally planned to raise US$30 billion but is now expected to scale that back to as low as US$20 billion. It plans to sell as many as 22.24 billion yuan-backed Class A shares in its IPO in Shanghai and another 25.4 billion shares in Hong Kong. The only uncertainty now rests on the issue price.
"Unfortunately, the sale comes amid bearish sentiment in the markets," Hua Meiyu, an investment manager at a Chinese insurer, said on June 4 when ABC issued its preliminary prospectus.
On the next trading day after the prospectus was released, the Shanghai Composite dived 1.6 percent.
Bank of China has already started subscription of its 40 billion yuan worth of bonds convertible into yuan-backed A shares.
BOC also hoped to complete its new H-share issue, the other component of its fund-rasing plan, by the end of this year, said Li Lihui, its president, in May.
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