Mid- and small-sized Chinese banks, under capital pressure, are looking to issue preferred shares, following the lead of large state-owned groups that are aggressively raising funds in capital markets.
China Citic Bank and China Guangfa Bank are the latest to look to preferred shares, and are close to drawing up proposals for issuances, according to two sources close to the companies.
The size of their proposed issuance could be Rmb15 billion to Rmb20 billion for each bank. However, the banks need to discuss the matter with regulators before formally announce their plans so that the timetable and the size are yet to be confirmed, the sources told FinanceAsia.
The two banks could not be reached for comment.
Smaller Chinese lenders are in urgent need of replenishing tier-1 capital as they need to meet Basel III capital requirements within the stipulated time frames.
Under China’s Basel III requirements, the minimum standard for banks’ tier-1 capital adequacy ratio is 7.5%. The largest banks must meet tier-1 capital adequacy ratio of 7.9% by the end of 2014 and 9.5% as at the end of 2018.
The two banks are the latest lenders thought to be planning such fundraisings after Ping An Bank, a commercial bank controlled by Shenzhen-based Ping An Insurance (Group), unveiled a plan to raise Rmb30 billion ($4.9 billion) on Wednesday by placing both new shares and preferred shares to investors.
Meanwhile, Shanghai Pudong Development Bank and Industrial Bank have also each announced plans to raise Rmb30 billion through preferred shares.
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. Meanwhile, banks can replenish tier-1 capital through preferred shares, something not possible by issuing bonds.
Big state banks have already started raising funds for capital replenishment. Bank of China, Industrial and Commercial Bank of China and Agricultural Bank of China announced plans earlier this year to issue a total of Rmb260 billion preferred shares from the onshore and offshore markets.
China's banking system will need Rmb552 billion to attain a common tier-1 ratio in 2019, according to rating agency S&P, based on its assumption that the lenders' risk assets will grow by 12% and their annual return on equity will be around 14%.
More challenges for smaller lenders
Smaller banks, however, are under more capital pressure than the big banks. As of the first quarter, China Citic Bank recorded a capital adequacy ratio of 8.78%, lower than the average level of bigger banks. China Guangfa Bank had a 7.5% ratio of tier-1 capital as of end-2013, based on its website data, which just satisfied the compliance.
“Smaller banks have less government support. The balance-sheet scale can’t match their rapid growth pace. Therefore, they are more eager for capital,” said Chen Xingyu, Shanghai-based analyst with a Hong Kong broker Phillip Securities.
A source close to Ping An Bank told FinanceAsia that capital adequacy level has been a bottleneck in its new business development. The tier-1 and capital adequacy ratio of Ping An Bank is 8.7% and 10.79%, slightly higher than current regulatory requirements. The two ratios will be raised to 10.35% and 12.44% after the preferred share issuance, said the source.
Furthermore, smaller lenders may have more difficulty selling new shares or preferred shares, according to analysts. “Investors are very cautious in buying into Chinese banks, especially smaller banks which are usually more risky,” said a Shenzhen-based banking analyst.
Ping An Bank plans to privately place Rmb10 billion new shares and Rmb20 billion preferred shares. However, the group company has agreed to take 45% to 50% of the new shares and 50% to 60% of the preferred shares.
“This means the real investor demand accounts for only half of the fundraising size,” said the banking analyst.
Banks have typically been put off issuing preferred shares due to the long process for regulatory approvals.
For smaller banks that want to raise funds sooner, there are few choices. Private share placement would be better since the approval process goes faster.
Bank of Nanjing, which had planned to issue preferred shares, changed to a private placement for up to Rmb8 billion. Its three largest shareholders will subscribe to almost 70% of the shares, said the bank on Thursday.