March 31,2010

NPL Concerns and New Bank IPOs Drive 600 Billion Yuan Financing Rush

By CSC staff, Shanghai

After China's the great leap in lending comes the inevitable great surge of refinancing. China's commercial banks, especially those that are very large and state-owned, are preparing for the rainy day of ever-accumulating non-performing loans (NPLs) by looking to raise 600 billion yuan from both the mainland and Hong Kong markets.

The Bank of China's (BoC) plan includes issuing 40 billion yuan in convertible bonds on the A-share market and selling H-shares on the Hong Kong market of not more than 20% of its capitalization, estimated at 85 billion yuan. The Bank of Communication (BankComm) has a 42 billion yuan A- and H-share plan. The Industrial and Commercial Bank of China's (ICBC) plan also includes 25 billion yuan in convertible A-shares and up to a 110 billion yuan H-share issue. China Merchant Bank has a 22 billion A- and H-share plan.

Among other municipal commercial banks, the Bank of Nanjing will issue 5 billion shares, Industrial Bank 18 billion shares, Shenzhen Development Bank 10.6 billion shares to Ping An Insurance, Bank of Ningbo 5 billion shares, and Pudong Development Bank is selling a 20% stake for 40 billion yuan to China Mobile.

Along with the 200 billion yuan IPO plan of the Agricultural Bank of China and the 20 billion yuan IPO plan of Everbright Bank, Chinese banks will suck 600 billion yuan from A-share and H-share markets. The state-owned banks will take the lion's share: 80%.

The piling up of bad loans is driving the state-owned banks' refinancing rush. So far the major state-owned banks' capital adequacy ratio is not bad: for ICBC it's 12.36%, China Construction Bank (CCB) 11.7%, and BoC 11.4%. Analysts say the banks are able to replenish capital with internal resources due to recent handsome profits.

Yet the China Banking Regulatory Commission (CBRC), led by the prudent chair Liu Mingkang, is pushing banks to prepare more capital for the exit from the stimulus policy and the worse-case scenario of a slowdown. In 2009,ICBC, BoC, and CCB profits increased by 18%, to 317 billion yuan. CBRC forced them to increase provision rates by 34.26, 29.45, and 44.19 percentage points, respectively, to 164.41%, 151.17%, and 175.77%.

The Ministry of Finance (MOF), with a 35.33% stake in ICBC and a 26.5% holding in BankComm, expressed interest in upping its stake in BankComm, and Huijing, a government-sponsored agency and major holder of ICBC, BOC and CCB, with 35.33%, 67.53% ,and 57.09%, respectively, may follow MOF to buy shares after having done so in October. Analysts say Huijing is considering buying CCB H-shares with USD, which is pegged to HKD.

To avoid excessive draining of the A-share market, the bank refinancing push is scheduled to finish 3 to 6 months before ABC launches its gigantic IPO at the end of the year.

The possible busting of the A-share market by the 600 billion yuan in refinancing plans is a cause of great concern for investors. At present the Shanghai Stock Composite Index is lingering in the neighborhood of 3000. Many small banks lining up for IPOs have become pessimistic over selling shares in 2010.


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