Ag. Bank of China issues $6.45b in pref shares

Agricultural Bank of China completes the second part of a total Rmb80 billion capital-raising exercise; ICBC is expected to be next as banks beef up their balance sheets.

Agricultural Bank of China (ABC) has completed the offering of Rmb40 billion ($6.45 billion) in preference shares. This follows another Rmb40 billion capital raising via the public offering of pref shares in November.

The second of two planned capital-raising exercises boosts the tier-1 capital adequacy ratio (CAR) at ABC by 83bps to 91bps, according to estimates in three separate research reports by a trio of Chinese brokers. As of end September, ABC’s tier-1 CAR was 8.89%. It is China’s third-largest lender by assets.

Analysts view the benefit of additional capital as outweighing any negative dilution experienced by existing shareholders.

“Despite a minor dilution on [its] earnings per share and book value per share, we view this [the preference share offering] as positive for its business growth in the long run,” said Wang Donger, a Hong Kong-based analyst at China Merchants Securities, reflecting market consensus.

ABC’s action is part of an ongoing series of capital raisings among Chinese lenders, all of whom have been working to meet tough new regulatory requirements for capital ratios. In November, Chinese authorities allowed banks to issue preference shares for the first time. Since then, nine banks have unveiled plans to issue a combined Rmb400 billion in pref shares.

The next in the pipeline is ICBC’s Rmb45 billion onshore issuance, which is expected to come as soon as April. The bank received the banking regulator’s green light for the deal last week.

Chinese regulators have sharpened their requirements in the face of a slowing economy at a time when banks have built up high levels of bad debts.

Under China’s Basel III requirements, the minimum standard for banks’ tier-1 capital adequacy ratio is 7.5%. The standard is higher for the largest banks: regulators demanded they raise tier-1 CAR to 7.9% by the end of 2014, and to 9.5% by the end of 2018.

That suggests Chinese banks must raise Rmb552 billion ($89.2 billion) to reach this ultimate target, according to rating agency Standard & Poor’s, based on its assumption that the lenders’ risk assets will grow on an annualised basis by 12%, and an annualised return on equity of 14%.

Preferred stock shareholders typically do not have voting rights but have seniority over common stock shareholders in the event of asset dispersal in a bankruptcy. Unlike bonds, pref shares can qualify as tier-1 capital.

Non-financial issuers are also turning to preference shares to shore up their balance sheets. At least seven corporations have announced plans to issue pref shares, including Shanghai-listed Inner Mongolia Yitai Coal, which said on Thursday that it plans to raise up to Rmb10 billion this way.

Second offering of ABC

ABC changed tactics on its second offering, this time opting to sell pref shares via a private placement, according to the company.

The price was set at a five-year national bond coupon plus 224bps, translating to a yield of 5.5%. The yield is 50bps tighter than the 6% coupon offered by the lender in the first issue in November.

That reflects the fact that interest rates in China have declined in the intervening period. The five-year government bond’s notional interest rate has declined by 50bps since November. That reality enabled ABC’s bankers to offer a tighter guidance for pricing, which ranged from 5.4% to 5.7% during the marketing period, according to Chen Xingyu, a banking analyst at Philip Capital.

Shanghai Putong Development Bank priced its Rmb15 billion pref share issue at 5.5% on March 16. Its first issue in December was also priced at 6%. No other banks have issued pref shares in the onshore market since then.

The ABC deal was 1.8 times covered by 27 investors, 37% of which are insurers, 25.9% are large corporate accounts, 30% are funds and asset management firms and 7.1% are trust companies. Large corporate accounts include China Tobacco and China Mobile Communication Corp.

Citic Securities was sole sponsor and joint bookrunner with China Galaxy Securities, CICC, Credit Suisse Founder, Goldman Sachs Gaohua, Guotai Junan Securities, Haitong Securities and Southwest Securities.

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