By Prudence Ho And Enda Curran
HONG KONG--Even as they battle souring loans and weak share
prices, China's banks have managed to raise a record US$110 billion
this year by tapping into investors' desire for yield.
The fundraising has been dominated by the sale of bonds,
including a preference-share option that was opened to banks this
year. The amount raised is more than double last year's US$43
billion, Dealogic figures show, and tops the record of US$82
billion raised in 2010, when one of China's biggest banks,
Agricultural Bank of China Ltd., raised US$22 billion in what was
then the world's biggest IPO.
Banks have gone on the capital-raising spree to cope with both
rising bad loans and Beijing's push for them to hold more capital.
China's banks chalked up a 36% surge in bad loans year over year in
September amid the country's slowest economic growth in five years.
At the same time, regulators have imposed a 2018 deadline for banks
to adopt the tough new global capital rules required by Basel III,
a global standard for bank strength.
China's banks will continue to tap markets for funds next year,
"to fund their growth and to meet regulatory requirements," said
Grace Wu, senior director of financial institutions at Fitch
Ratings.
While a recent surprise rate cut by China's central bank has
buoyed the country's long-embattled bank stocks, shares of many
banks, although rising, continue to trade below the value of their
assets, or below book, making equity fundraising a second-best
option to the wide-open bond window.
Of the $110 billion raised, 98% has come in the form of debt,
from both bonds sold in China and offshore. About 22% of the debt
has been from preference shares, which Beijing began allowing in
April.
Preference shares have features of bonds and equity, but
investors see the product more as a fixed-income tool because it
pays interest regularly.
Preference shares give no voting rights to investors and could
become worthless in the event of a default. But they can be
converted into equity and they carry high yields to reflect the
risks, a boon at a time when global interest rates remain low. They
are also counted toward Tier 1 capital, a key measure of a banks'
financial strength within the Basel III framework.
China's biggest lender by assets, Industrial & Commercial
Bank of China Ltd. sold US$5.69 billion in preference shares to
investors last week, becoming the fourth mainland lender to sell
such instruments, according to Dealogic. The yield on the bond was
6%, according to people familiar with the matter, well above the
five-year U.S. Treasury bond yield of 1.6%, eliciting almost US$28
billion in orders.
While stock-dividend yields at China's big banks are generally
high--at around 5% to 6%--buyers of preferred shares have the
advantage of regular income without the volatility that besets the
sector's shares.
"Usually, institutional investors, such as pension funds and
bond funds who have bond mandates, are interested in buying these
preference shares, " said Dominique Jooris, head of credit capital
markets for Asia, excluding Japan, at Goldman Sachs Group Inc.
Bank of China kicked off the sale of preference shares in
October, selling $6.5 billion worth in an offshore issuance at a
6.75% yield. In November, it raised an additional US$5.2 billion in
a domestic offering that yielded 6%.
Agricultural Bank of China raised 40 billion yuan (US$6.5
billion) in October from domestic preference shares yielding
6%.
In all, seven Chinese banks have announced plans to raise more
than US$60 billion from preference shares.
The addition of the product to the arsenal of fundraising tools
has come as a welcome relief at a time when the equity market, from
IPOs to secondary share sales, has been closed off. China doesn't
allow banks to raise equity if they sell shares below their book
value, while many recent listings, such one in March by Harbin Bank
Co., are trading below their issue price.
"It seems highly unlikely at this point that we will see much
common-equity [share sales] issuance by mainland banks," said
Mizuho Securities analyst Jim Antos.
China Guangfa Bank, in which Citigroup Inc. is a shareholder,
and Bank of Shanghai, partly owned by HSBC Holdings PLC, picked
banks to handle planned listings more than two years ago but have
yet to begin the process of going public and are unlikely to do so
in coming months, according to people familiar with the matter.
Anjani Trivedi contributed to this article.
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