BoCom private placement

BoCom seeks $9 billion through private placement

The deal will make Bank of Communications the best capitalised bank among its domestic peers, analysts say.
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Chinese banks are boosting capital to protect against a rise in bad loans
<div style="text-align: left;"> Chinese banks are boosting capital to protect against a rise in bad loans </div>

Bank of Communications (BoCom), China’s fifth-largest lender by assets, plans to raise Rmb56.6 billion ($9 billion) in what could be one of the world’s biggest share sales this year. The deal will make Bocom the country’s best-capitalised bank, analysts say.

Although the transaction will be made through a private placement with a dozen institutional investors participating, the massive scale of the offering signals that China remains focused on promoting economic growth and is starting to let the banks increase their lending capacity. BoCom is the first Chinese bank to replenish its capital reserves after Beijing tightened capital rules for the country’s lenders last year.

Indeed, the slowdown in global growth has eroded corporate earnings in China and is driving up the number of bad loans among Chinese commercial lenders. According to Standard & Poor’s, non-performing loans are likely to reach 5% in 2012, prompting the banks to boost their capital reserves.

The Shanghai-based lender, which has listed in both its home city and Hong Kong, plans to offer 6.54 billion A-shares at Rmb4.55 each, and 5.84 billion H-shares at HK$5.63 ($0.73) per piece, respectively, which will generate gross proceeds of roughly Rmb56.6 billion, the bank said in a statement to the Hong Kong stock exchange.

The A-share offering price represents a 6.5% discount compared with the last closing price of Rmb4.87 in Shanghai, while the H-share offering price stands at a 9% discount compared with the previous closing price of HK$6.19 in Hong Kong on Wednesday. The stock was suspended from trading on both exchanges yesterday and will resume trading today.

The number of new shares will represent about 16.7% of the enlarged share capital.

“The offering will dilute BoCom’s 2012 earnings per share by about 17%, but it will boost the bank’s tier-1 capital adequacy ratio (CAR) to about 11%, making BoCom the best capitalised bank among its large-cap peers,” said Sheng Nan, a senior banking analyst at CCB International Securities.

“The fact that this capital raising will likely come in the form of a placement will limit the amount of shares flowing into the open market, and subsequently minimise disruption to the current supply-and-demand situation for shares,” Sheng said.

“The share placement is aimed at satisfying the capital needs of the company to achieve sustainable and stable business development ... and the increasingly stringent regulatory requirements,” the bank said in the statement.

It said that 12 institutional investors have agreed to take part in the placement, including China’s Ministry of Finance and National Social Security Fund, HSBC, auto-maker FAW Group and tobacco manufacturer Hongta Group.

HSBC will pay about $1.71 billion for 2.36 billion Hong Kong listed shares, which will maintain its stake in the bank at 19%. The bank will buy the shares with cash from internal resources, it said in a separate statement.

China’s Ministry of Finance, which has a controlling stake of about 27%, will spend Rmb15 billion to keep its ownership from being diluted, BoCom said.

Citic Securities is the placing agent of the deal.

BoCom has said its capital adequacy ratio fell to 11.89% in the third quarter last year from 12.36% at the beginning of 2011. Whereas its core capital adequacy ratio dropped to 9.24%, lower than the 9.5% mandatory minimum under the regulator’s new capital plan.

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