China banks face up to capital delays
* PBoC slow to approve subordinated bond issues
* Onshore bankers suspect regulator trying to curb lending
* Banks may resort to preferred share issuance
By Carrie Hong
SINGAPORE, Dec 9 (IFR) - A growing backlog of onshore subordinated bonds is putting Chinese lenders under pressure to find alternative sources of capital, potentially opening the door for the country's first preferred share issuance.
China's banks have announced plans to issue Rmb327.7bn (US$53.8bn) of Tier 2 bonds to top up their Basel III capital, according to regulatory filings and company sources. The People's Bank of China has been slow to grant approvals, however, and only one lender has issued Tier 2 debt in the local market since China adopted Basel III rules at the start of 2013.
Bankers suspect the central bank is blocking the deals as part of an ongoing effort to force the industry to deleverage, amid a sweeping reform programme aimed at restricting the growth of off-balance sheet financing and limiting bad loans.
The PBoC has not publicly said anything about blocking Tier 2 capital issuance, yet some 10 onshore deals are waiting in the pipeline for approvals.
"Most of the deals have obtained approvals from the China Banking Regulatory Commission and some have done roadshows, but the PBoC seems to have stopped the Tier 2 deals from progressing at this stage," said one banking source.
Agricultural Bank of China and China Everbright Bank are understood to be most advanced in their preparations for deals. ABC plans to sell up to Rmb50bn of Tier 2 subordinated bonds, while China Everbright Bank had plans to raise Rmb16.2bn. The far-smaller Tianjin Binhai Rural Commercial Bank had opened that market on July 25 with a 10-year non-call five Tier 2 bond at a yield of 6.50%. That has been the only deal to be completed so far.
"ABC was hoping to be the first to come out after Tianjin Binhai's test drive, and we were told hopefully (to launch it) before the year end," said one of the sources. "However, it seems highly unlikely now; the PBoC seems to have concerns on the risks inside the banking system, and issuing Tier 2 can't help shift the risk."
TIER 1 ALTERNATIVE
With little clarity on when the Tier 2 backlog will begin to clear, attention is likely to shift to the potential for preferred shares that will count as additional Tier 1 capital.
China's State Council on November 30 published guidelines on a trial programme, allowing companies to issue preferred shares for the first time since the 1980s.
The CSRC said it would seek public comments in the near future, based on the council's guidelines. Issuance will be limited to 50% of common stock and 50% of net assets. Bankers expect the first preferred offering to come in the first half of next year.
While the guidelines are not specific to the financial sector, listed banks, including Bank of China, Shanghai Pudong Development Bank and Agricultural Bank of China, are expected to be the first to offer preferred shares, while insurers and power companies are expected to follow suit. Insurers, the National Social Security Fund and corporate pension funds are expected to be the main investors, once regulations are set.
"The insurers also need China Insurance Regulatory Commission to grant approval to invest in preferred shares. It is important because insurers will be the main buyers of these," said a banker.
Hopes for a surge of capital raisings, however, will depend on regulatory approval. Regulators have been working to create the best formula to maintain GDP growth, but also to keep leverage under control.
"The top authorities need to keep the economy growing and funding growth at a certain level, but, in the interim, they also want to keep the total social financing volume within control," said another banker.
The PBoC showed its reluctance to inject liquidity into China's banking system, sparking a surge in interbank lending rates in June that some analysts believe was designed to restrict bank leverage.
"If the banks are allowed to issue Tier 2 in big sizes, nobody will take the deleveraging seriously once the capital base is enlarged," said another source.
A continued delay in the endorsement of Tier 2 trades well into next year will have the effect of forcing banks to rein in lending or top up equity to meet tougher capital adequacy requirements.
China's version of Basel III rules require lenders to maintain a core capital adequacy ratio of at least 8.5% and a total ratio of 10.5%, rising to 9.5% and 11.5%, respectively, for systemically important banks.
Third-quarter reports show that ABC's core and total capital ratios ranked the lowest among the big four at 9.35% and 12.01%, respectively, below the required levels under the new framework.
China Minsheng Banking Corp, China Everbright Bank and Ping An Bank all posted capital ratios below the industry average. (Reporting By Carrie Hong; Editing by Christopher Langner, Steve Garton and Timothy Sifert)
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