ICBC to issue $12.9b of preferred shares

ICBC’s plans to issue Rmb80 billion ($12.9 billion) worth of preferred shares should prepare the bank for expansion. Earliest issuance seen is fourth quarter.

Industrial and Commercial Bank of China said it plans to issue preferred shares worth Rmb80 billion ($12.9 billion), becoming the latest Chinese bank to tap capital markets to meet tougher capital rules.

Analysts expect the earliest ICBC would be able to issue the shares will be during the fourth quarter and they anticipated limited impact on the earnings of China’s largest state-owned bank by assets and market value.

ICBC had already flagged the share issue was coming, but after the market closed on Friday it gave other details in a regulatory filing with the Shanghai Stock Exchange, such as the method of distribution, eligibility as well as terms and conditions. It also said in the filing that the shares would be sold through private placements in both A-share and overseas markets.

The bank joins a long list of Chinese lenders looking to replenish their capital bases and meet tougher regulatory requirements for capital ratios. Banks are coming under additional pressure as China’s economic growth slows and bad debts build up in the banking system.

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.

China's banking system will need Rmb552 billion ($89.2 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%.

Chinese banking and securities regulators published detailed rules on the issuance of preferred shares by commercial banks on April 18. 

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.

Assuming ICBC issues all the shares, Deutsche Bank analysts estimated that ICBC’s tier-1 ratio would be raised by 61 basis points to 11.7% in 2014. The implementation of an internal rating based approach could boost its tier-1 ratio by another 60 basis points.

“We see ICBC’s capital base is strong enough to support its business expansion in the foreseeable future,” said Deutsche Bank banking analysts in a research report. 

ICBC’s board of directors approved the proposal to issue preferred shares on July 25, including Rmb45 billion in the A-share market and Rmb35 billion in overseas markets.

The proposal is still subject to shareholder approval at the AGM on September 19 and needs a green light from regulators, the CBRC and the CSRC, so analysts estimated the earliest possible issuance would be in the fiscal fourth quarter.

Deutsche Bank said it expected the gross dividend yield of ICBC’s preferred shares to be about 6.5%, which would be in line with other Chinese banks ABC and BOC. 

Deutsche Bank added that the cost of preferred share issuance should be largely offset by an equivalent earnings yield over the medium term; therefore the impact on ICBC’s earnings should be limited.

Analysts also noted the mandatory conversion into ordinary A-shares would be triggered if the CET1 decreases to or below 5.125%. The dividends are non-cumulative and preferred shareholders are not entitled to voting rights unless it is under the circumstances stipulated in the issuance document.

ICBC is entitled to redeem all or part of the preferred shares after five years of issuance at a price equal to nominal value plus any declared but unpaid dividends for the then-current dividend period; the duration is perpetual in nature.

The dividend yield is adjustable within an undetermined time period, which is equivalent to a benchmark rate plus a fixed premium.

Sources earlier told FinanceAsia that Citic Securities, China Securities, Goldman Sachs Gao Hua Securities, Guotai Junan Securities, Huatai United Securities and UBS Securities are working on the A-share placement transaction, while ICBC International, Goldman Sachs, UBS, Bank of America Merrill Lynch and Deutsche Bank are handling the H-share offering.

Additional reporting by Jing Song

 

 

¬ Haymarket Media Limited. All rights reserved.