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Preference shares eyed to lift capital
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THREE of China’s top 10 banks plan to issue up to 60 billion yuan (US$9.79 billion) of preference shares by the end of this year, according to filings with the Shanghai Stock Exchange.
As growth slows and bad debts build up, China’s banks are rushing to replenish their balance sheets to meet the tough new global bank capital regulations known as Basel III.
Banks are “less likely to be able to use equity because most of them are trading below book,” said Edmond Law, bank analyst at UOB Kay Hian (Hong Kong) Ltd.
“Preference shares is the more efficient way to replenish Tier-1 capital.”
Preference shares behave like bonds, and convert into common equity if the bank’s core capital falls below certain trigger ratios.
Their introduction in 2013 was welcomed by Chinese retail investors as they are considered non-dilutive to ordinary share valuations.
Shanghai Pudong Development Bank, the Industrial Bank and the Bank of China plan to issue 15 billion yuan, 13 billion yuan and 32 billion yuan of preference shares respectively.
As preference shares yield a higher rate of interest, in the short term, investors may switch and lose their taste for common equity, analysts said.
BOC sold US$6.5 billion in preference shares in October, launching a wave of fundraising by China’s biggest banks.
Last week, the Industrial and Commercial Bank of China, the country’s biggest lender, said it had received bank regulator approval to issue up to 35 billion yuan of offshore preference shares.
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