China Merchants Bank proposes $2.6 billion rights issue

China Merchants Bank has proposed a rights issue that could raise as much as Rmb18 billion ($2.63 billion). If completed it could be one of the largest rights offerings of 2009.
 
The dual-issuance deal will contain up to 3.1 billion A-shares and 692 million H-shares. Both kinds of shares will be offered at a ratio of two rights shares for every 10 existing shares held.
 
The rationale for the issue "is to improve the core capital adequacy ratio of the company to support the continuing development and growth of its business", CMB said in a Hong Kong stock exchange filing. According to the bank's first-quarter earnings report, the core capital adequacy stood at 6.54%.
 
The offering price for shares in the deal has not yet been set, but it is expected to raise between Rmb15 billion and Rmb18 billion. The price will not be lower than Rmb5.41 per share, the audited net asset value per share as in the financial statements at the end of 2008.
 
The latest share price before the deal was announced on Friday was Rmb17.68 for the A-shares and HK$17.72 ($2.28) for the H-shares. After the news of the rights issue broke on Friday, the A-shares were down by 2.38% and the H-shares gained 3.4%. The shares then sailed into a general malaise in the markets -- the A-shares were down by another 6.4% yesterday and the H-shares were down by 1.75%.
 
The issue is subject to approval by the company's shareholders, the China Banking Regulatory Commission (CBRC) and the China Securities Regulatory Commission (CSRC). Since the shareholders' extraordinary general meeting is not until October 9, the earliest the deal could take place is in the final quarter of the year.
 
If the deal is completed by the end of the year, it would be one of the largest rights issues in 2009, just behind DBS Group Holdings' $2.75 billion rights issue in January, according to Dealogic. So far this year, Southeast Asia has undertaken the lion's share of Asian rights issuance -- eight of the 10 largest rights offerings have been in Singapore and Malaysia.
 
There are further catalysts that suggest the bank could continue to trade downwards. China's listed banks report their earnings for the first half of 2009 over the next couple of weeks, and CMB will probably post weak numbers, say analysts. In a report published last Thursday, Credit Suisse estimated a 39% year-on-year decline in net profit for CMB, down to Rmb8.08 billion.

Despite the continued bad news, the Swiss bank thinks that China Merchants does have some potential to surprise. Since it is the Chinese bank with the greatest exposure to the private sector, "the recent rebound in the China property market and increasing signs of stabilisation in the US economy, we believe there is more upside risk to forward earnings estimates for [China Merchants]", said the report.

Various media have reported that China Merchants Bank, CICC, Citic Securities, China Merchants Securities, and Goldman Sachs Gao Hua Securities are working on the A-share tranche while Bank of America Merrill Lynch, BNP Paribas, J.P. Morgan and UBS are bookrunners for the H-share portion. CMB did not confirm the news.