Stock offering plans by China’s banks seen as short-term fix

Stock offering plans by China’s banks seen as short-term fix

5:15pm EDT

By Michael Flaherty and Denny Thomas

HONG KONG (Reuters) – For the Chinese banks seeking billions of dollars in upcoming stock offerings, a concern is growing that the money will only refinance old loans and do little to prevent the lenders from hitting up shareholders for more cash in a few years or less. In 2010, Chinese lenders raised $82 billion as a surging stock market helped them replenish cash after a post-financial crisis lending binge. Now, in a far less forgiving climate, they are again lining up for more money, attempting to tap investors as the economy slows, profits shrink and unpaid debts pile up.China’s largest banks are well capitalized compared to their global peers. But the same cannot be said for its small to mid-sized banks, where a pipeline of stock deals is adding up at a time when worries are rising about their exposure to the country’s slowdown and the health of their balance sheets.

By issuing new shares, the banks will be diluting historically low share prices, with little clarity on where the cash is going or how it will help them weather the turmoil building up in China’s financial markets.

“Is the money being raised for international expansion? Are there going to be many changes with more capital? No,” said China bank analyst Mike Werner of Bernstein Research. “Are they going to have to raise capital again, three years down the road? Probably.”

UBS estimates that Chinese banks listed in Hong Kong face a capital shortfall of 300 billion yuan ($49 billion). For those not listed in Hong Kong, a steady march of small to mid-sized Chinese lenders plan to issue shares in the city.

Around $11 billion worth of share sales by China’s financial institutions are expected in Hong Kong from now to the first half of next year, Thomson Reuters data show.

Bank of Chongqing plans to raise up to $800 million in a Hong Kong IPO, while Bank of Shanghai is seeking around $2 billion in a combined Shanghai and Hong Kong offering, according to previous reports by Reuters and IFR.

Huishang Bank, a Hefei-based city commercial bank, filed on August 26 its papers for a Hong Kong listing, estimated to be worth as much as $2 billion.

Issuing new stock is not the only option for China’s bloated lending sector. Suspending dividend payments and slowing down loans are two possible paths. Consolidation is another way to address an industry suffering from over-capacity.

But given the downshift in China’s economic engine, Beijing is expected to continue to push its banks to keep lending to prop up consumers and businesses.

“The mega banks and national banks appear to be better placed to withstand China’s economic downturn,” Standard & Poor’s said in a note published last week.

Most of the smaller players, however, look set to weaken, with some facing “deteriorated funding and liquidity profiles,” the ratings agency warned.

M&A

The so-called Big Four – Industrial and Commercial Bank of China (1398.HK: Quote, Profile, Research, Stock Buzz)(601398.SS: Quote, Profile, Research, Stock Buzz), China Construction Bank (0939.HK: Quote, Profile,Research, Stock Buzz)(601939.SS: Quote, Profile, Research, Stock Buzz), Agricultural Bank of China (1288.HK: Quote, Profile, Research, Stock Buzz)(601288.SS: Quote, Profile, Research, Stock Buzz) and Bank Of China (3988.HK: Quote, Profile, Research, Stock Buzz)(601988.SS: Quote, Profile, Research, Stock Buzz) – all posted better-than-expected quarterly profits last week.

The banks also have comfortable capital bases compared to their domestic and global rivals and are experimenting with hybrid securities to boost that cushion.

Such strength has given rise to the idea that rather than constantly issuing new shares, China’s smaller banks should be folded into the larger ones.

“We believe the top banks, particularly national banks and large regional banks, could spearhead massive market-driven consolidation,” S&P said in the note.

May Yan, a Barclays analyst who covers China’s banks, echoed that view, saying the idea of China’s big banks buying the smaller ones makes sense. But she added that such a step has very little chance of happening in the current context.

Local governments in China – which in many cases own stakes in local banks – are particularly adamant against the thought of combining lenders, she said. Previous attempts of Chinese banks trying to buy into peers were met with stiff local resistance, she added, with the main concern being job losses.

OTHER OBSTACLES

For some banks needing cash to plug funding gaps, roll over loans, boost capital positions, or all three, one key obstacle stands in the way.

A Chinese government rule prevents mainland banks from raising funds in the equity markets when their price is below book value.

Seven mid-sized banks, including Ping An Bank (000001.SZ: Quote, Profile, Research, Stock Buzz) and Huaxia Bank (600015.SS: Quote, Profile, Research, Stock Buzz), have a Shanghai-listed price to book ratio of less than 1 as of the end of August, Thomson Reuters data show. That is roughly half the value of where the sector traded in 2010.

China Everbright Bank (601818.SS: Quote, Profile, Research, Stock Buzz), in addition to having a book ratio below 1, also has the lowest core Tier 1 ratio – a measurement of a bank’s capital reserves – of the country’s top 15 banks by size. See chart: link.reuters.com/wyh72v

Everbright is attempting, for the third time in three years, to list in Hong Kong.

Whether cash from investors is what banks like Everbright need, however, continues to be debated.

“What they really need to do is slow down their growth. If they can’t raise the equity or if it becomes too expensive to raise that equity, the only real option available to them is to slow down their balance sheet growth,” said Bernstein’s Werner, speaking broadly about the sector.

“If they do that, they don’t need that incremental equity, but nobody wants to slow.”