China Merchants Bank (CMB) has received the green light from regulators to go ahead with a massive rights issue that could raise up to Rmb35 billion ($5.5 billion). The approval means it will be able to join the wave of Chinese banks raising funds to fortify their balance sheets. The timetable has yet to be set, however.
Given the size, the deal is likely to be a big drain on the appetite for banking shares. Indeed, unlike several of its domestic peers that have opted for placements of either A- or H-shares, CMB plans to tap existing holders of both its A- and H-shares.
It will offer 2.2 shares for every 10 shares held and will issue 3.89 billion new A-shares and 860 million H-shares. This means that about 82% of the fundraising will come from the sale of Shanghai-listed A-shares, while only 12% will come from Hong Kong-listed H-shares.
The bank hasn’t set a price range yet, but it is widely expected that it has to offer a steep discount to attract enough interest. CMB’s Shanghai-listed shares are up 1.3% so far this year to yesterday’s close of Rmb11.83, but have fallen 9.2% from the March 2 peak of Rmb13.04. The A-shares are currently trading at a 2012 price-to-earnings ratio of 6.4 times. In Hong Kong, CMB’s share price is down 3.7% so far this year to yesterday’s close of HK$15.58. The H-shares are quoted at a 2012 P/E ratio of 7.18 times.
As of the end of 2011, CMB had a capital adequacy ratio of 11.5% and a core capital adequacy ratio of 8.2%, which is below the regulatory requirements. So, replenishing its capital reserve in order to boost lending capacity is an urgent matter for the bank. China hasn’t announced a lending target for 2012, but Barclays estimates that Chinese banks will issue about Rmb8 trillion of new loans this year.
Last month, Bank of Communications said it will raise Rmb56.6 billion through a private placement of A-shares that could be one of the world’s biggest share sales this year. A week later, China Minsheng Bank raised $1.44 billion from a placement of new H-shares, and only two days after that, Bank of Beijing said it had pocketed Rmb11.8 billion from another A-share private placement.
The deals are coming even though the market conditions aren’t that favourable. While the Shanghai Composite Index has gained 6% year-to-date on the expectation that Beijing will start to ease monetary policy, it is still 62% below its peak in 2007. And the gauge has been one of the world's worst performing indices for two consecutive years.
All of China's publicly traded banks posted strong 2011 results, but that hasn’t stopped their share prices from falling as analysts project that bank profitability will fall due to soaring non-performing loans and weak demand.
A volatile stock market, unaffordable property prices and high inflation have made Chinese investors turn to a seemingly more reliable investment product – gold. The country's demand for gold grew 20% in 2011 to more than 760 tonnes, according to the World Gold Council.
“The main driver came from demand for bullion bars as investment as people seemed to have totally lost their faith in the stock market,” Song Xin, CEO of China Gold International, said.
CMB said its 2011 net profit amounted to Rmb36 billion, up 40% from Rmb25 billion in 2010.