Issuance rumours fuel China bank funding concerns
SINGAPORE, Oct 13 (IFR) - The China bank space is in the spotlight, with potential G3 issuance from Bank of China (BOC) and China Merchants Bank (CMB) fuelling speculation of funding pressures at the PRC mainland lenders with Hong Kong subsidiaries.
The rumours first surfaced on Monday when Huijin Investment - the subsidiary of China's sovereign wealth fund which owns major stakes in the country's banks and is charged with investing in the China FIG sector - was in the market picking up the stock of Agricultural Bank of China, BOC, China Construction Bank, and Industrial and Commercial Bank of China. The purchases, although for a paltry US$31m total across the four lenders, caused a sharp reversal of the recent decline in their Hong Kong-listed stock prices, pushing them up between 8% and 16%.
"Fast money thinks some of the Chinese banks are in trouble, which has been reflected in the upward surge in their CDS spreads since July. No one believes the official figure for NPLs at the big banks, which is supposed to be in the 1% area, but which the hedge funds and prop traders believe is higher. There is an underlying sense that Huijin was telegraphing the government's implicit support for those banks and trying to staunch rumours of trouble which might choke off the banks' access to wholesale funding markets," said a regional syndicate banker.
On the day of the Huijin purchases, BOC was rumoured to be preparing a 10-year subordinated US dollar Lower Tier 2 bullet, structured to convert to senior with a reduced coupon should Basel III regulatory changes deem that the paper not qualify as bank capital. The bank was taken on non-deal roadshows by BOC International, Citi and Deutsche Bank early last month, added credence to the gossip.
Outstanding BOC 2020s backed off 5bp on the chatter to Treasuries plus 350bp bid. The syndicate banker suggested a new deal would need to price 100bp back from there to clear, a level which - if agreed to by BOC - would have repriced the entire China bank offshore curve, as well as adding to the general unease swirling around the sector.
Former PBOC deputy governor Wu Xiaoling told Reuters in August that the large Chinese banks face capital shortfalls of Rmb400bn-500bn (USD63bn-USD78bn) over the next five years due to Basel III compliance, and that: "Along with a quick expansion of domestic loans, banks will generally face relatively heavy pressure on ordinary capital."
But he added that with capital adequacy ratios averaging 12% and core capital averaging 9% there was no immediate funding pressure at the mainland's large lenders - something doubted by a somewhat sceptical large segment of the Asia-focused fast-money community given the PRC banking sector's large exposure to regional governments and the increasingly precarious property and shipping industries.
MAYBE, MAYBE NOT
Meanwhile, China Merchants Bank (CMB) is planning a USD300m three-year CD led by ANZ and Standard Chartered, which is dividing the market by raising the thorny issue of whether or not it marks the reopening of the public Asia dollar offshore primary bond space.
A banker away from the trade suggested it was driven by reverse enquiry, would involve only a limited number of investors already in close contact with CMB, and was essentially a cross trade being facilitated by the leads who would earn minimum wallet on the deal.
ANZ, which has almost zero presence in the Asia G3 primary bond markets, was rumoured to have been mandated solely on the back of providing a bilateral loan to CMB at an ultra-tight rate, potentially wearing a loss on the loan versus its own cost of funds.
A banker close to the deal, however, sees it as a true reopening of the Asia ex-Yen G3 public markets, and predicted full distribution statistics following a print, which would involve a significant number of investors and a geographical/investor split typical of a public G3 issue. Books have been heard around USD150m, with a further tightening of guidance from the mid-swaps plus 300bp area likely before pricing.
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