Fundraising pressure on China's banks unlikely to ease
Despite a flurry of deals last year that raised nearly USD 82 bn, stock and bond sales by China's banks are expected to continue as the industry pumps out loans to support its economy.
January 13, 2011 / 18:52 IST
Despite a flurry of deals last year that raised nearly USD 82 bn, stock and bond sales by China's banks are expected to continue as the industry pumps out loans to support its economy.
While Industrial and Commercial Bank of China said on Thursday it will not pursue fund raising for another three years, other banks may have to tap markets to keep up with loan growth.The Agricultural Bank of China, having raised USD 22 bn in an IPO last August, has already tapped investors for another USD 8 bn of capital barely two weeks into 2011. And that still may not be enough, according to some analysts.With Chinese banks embarking on another lending spree in recent months, some may not have as big a cushion as they think when it comes to cash reserves. For now, though, the near term fund raising targets are expected to be small to mid-sized lenders such as China Merchants Bank, analysts say. China Merchant's top-quality reserves -- known as Core Tier 1 capital -- are the lowest among the top eight."The smaller players are known for growing their loan book aggressively, so I expect share issues to be something that may happen again in the future," said Sophia Huo, an analyst at Daiwa Securities in Hong Kong.China Merchants Bank declined to comment for this article.Chinese banks raised USD 81.6 bn to shore up their balance sheets in 2010, according to Thomson Reuters data, with AgBank's IPO and clocking in as the world's biggest IPO on record.The tighter capital controls come at a time when regulators are trying to pull back on lending to drain liquidity out of the system and cool China's red-hot growth, with tougher rules expected in the coming year.However, despite all the rhetoric about restricted lending, the banks don't seem to be listening, with overall loans climbing to 1.6 trillion yuan in the last quarter of 2010 as borrowers tapped the banks ahead of an expected rise in interest rates.And the new year has brought no sign of a slowdown, with sources saying banks doled out 500 bn yuan (USD 75.6 bn) in new loans in the first week of January alone."The banks have their own relationships they need to maintain with their customers, so they probably have to continue lending if their customers want it," said Daiwa's Huo.Among the stock deals anticipated for 2011, mid-sized lender China CITIC Bank, 15% owned by Spain's BBVA, said it would look to raise more than USD 3 bn.AgBank may need a fresh infusion of cash as early as 2012, when its self-imposed three-year limit on new fundraising expires.Michael Werner, senior equity analyst at Bernstein Research said that even after AgBank's fund raising efforts, its core capital ratio is 9.75%, or slightly below what China's banks are aiming for."In our view, (AgBank) has three options. They're going to have to slow down asset growth, raise capital, or significantly increase profits," said Werner, who rates AgBank as "Market Perform."Fundraising pressure and expectations are beginning to show on the banks' share performance. Despite expectations of rising interest rates which boost margins, top lenders such as China Construction Bank and Bank of China all trade at about 10 times estimated 2010 earnings, lower than global peer HSBC's 14 times.Shares of China Merchants have fallen almost 15 percent in the past 2-1/2 months alone, worse than the 10 percent decline on the benchmark Shanghai Composite index."Different business model"China's bank executives have the unenviable task of dealing with a zealousregulator that sets rules on everything from lending spreads to dividend payout ratios, all for a small fraction of the salary their peers at Western banks receive. Most of China's major banks hand out a dividend ratio of about 40-50% of their earnings, a number that is kept in check by regulators and cannot be adjusted according to their performance that year.And unlike most other economies where companies can issue debt to pay for new projects, China's bond market is still relatively young, so companies prefer to turn to banks for money when they have a new initiative they want to pursue.This makes China's banks the primary source of funding for companies, meaning any lending growth to help boost the economy and GDP figures must be followed by similar growth in deposits just to maintain its capital ratio."If regulators and banks in China choose to follow the current business model of fixed payouts and lots of lending, it just means all of them will have to tap the equity markets every 3-5 years," said Sheng Nan, an analyst at UOB Kay Hian."This model is different from Western banks, and that's something investors have to decide they can live with." Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
