Chinese banks' balancing act

China's banks will need to raise large amounts of capital this year to continue their aggressive lending and still meet the regulators' capital adequacy requirements.

China's listed banks intend to raise nearly $30 billion from the equity markets in 2010 to boost their capital adequacy ratios so that they can continue to pump money into the economy under the government's order to ensure sustainable growth.

China's regulators intend to tighten credit to stave off potential inflation and asset bubbles, but at the same time they want to provide sufficient capital to avoid project defaults leading to bad loans. Chinese banks face a conflict of interest in that they have to follow the government's command but also want to make profits by aggressively providing loans.

The banks' current capital levels are close to the regulators' requirements of a 12% total capital adequacy ratio (CAR), including 8% in tier-1 capital.

However, the fast loan growth in the first three weeks of this year is driving lenders to increase their liquidity so as to be able to participate in that rapid growth and still meet the regulatory CAR requirements.

The banks decline to comment on how much money they are aiming for, but Lian Ping, chief economist of Bank of Communications (BoCom) in Shanghai, estimates they will need to raise $29.3 billion (Rmb200 billion) this year.

"Banks will raise funds through various channels, including new bond issues, rights issues and share placements, either in the domestic or overseas markets. I believe they are in the process of preparation now," Lian said.

The most capital-thirsty among the Chinese lenders is Bank of China (BOC), which needs to absorb Rmb80 billion, followed by BoCom, which is looking for over Rmb30 billion in fresh capital this year, according to May Yan, an analyst at Nomura International.

The most aggressive state-run bank to expand its loan books last year, Bank of China, said last Friday that it plans to sell up to Rmb40 billion ($5.8 billion), of domestic convertible bonds to replenish its capital. It will issue corporate bonds with maturities that could range from one to six years and which will be convertible into Shanghai-listed A-shares.

Other banks too felt the pinch of last year's excessive lending, which totalled Rmb9.6 trillion. China Merchants Bank's said last August that it planned to raise Rmb18 billion to Rmb22 billion via a rights issue in Shanghai and Hong Kong to meet the government's increased requirement on the banks' CAR, but later put the plan on hold. Analysts say the deal will take place in the first half this year.

China Merchants Bank is short of cash also because it paid 3.1 times book value for a 53% stake in Hong Kong's Wing Lung Bank. The deal, which was the second most expensive bank acquisition in Hong Kong, was announced in mid-2008 and completed early last year.

Industrial & Commercial Bank of China (ICBC), the country's largest and most profitable lender, will require the least cash replenishment among the listed banks, BoCom's Lian said. Senior executives at ICBC earlier this week said the bank will post a 15% year-on-year increase in net profit in 2009.

Helped by income from lending repayments, Chinese banks in general will post good earnings with 5% to 15% growth last year and a 20% to 25% increase expected in 2010, BoCom forecasts.

Nevertheless, shareholders are worried that the government will tighten monetary policy and freeze bank lending -- which contributes over 80% of the lenders' revenue -- and are cashing in their bank holdings. As of yesterday, Shanghai's benchmark index had fallen 10.4% this year, while Hong Kong's Hang Seng Index had dropped by 6.7%, both heavily influenced by losses in banking stocks.

"Banks will have to offer shares at a 2% to 5% discount on the top of the already reduced share prices," said Tony Tong, an analyst at China Everbright Research.

The massive credit boom last year makes it difficult for banks to curtail their lending this year, as many new projects that they funded in 2009 will need further capital in order to be completed.

The market expects Chinese lenders to extend as much as Rmb9 trillion of new loans in 2010, exceeding the government's target of Rmb7.5 trillion, according to Nomura's Yan.

Indeed, credit growth is still strong; Chinese banks have doled out Rmb1.45 trillion of new loans so far this year compared to Rmb1.62 trillion last January, according to HSBC. The China Banking Regulatory Committee (CBRC) has asked banks to report new lending on a daily basis to closely monitor credit growth, HSBC said in a report.

The Chinese government has to eliminate growing inflation and asset bubbles and at the same time needs to maintain hard-won economic growth. It is not an easy job, as was mentioned by deputy commerce minister Zhong Shan in a statement released on the Ministry of Commerce's website yesterday.

"The pressure to adjust the economic stimulus measures is growing; the nation faces growing difficulty in maintaining policy stability and consistency," Zhong said. 

¬ Haymarket Media Limited. All rights reserved.
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