Cover Story-r1:AMM grid in qxp 12/24/09 9:35 AM Page 33
“I would be quite keen to participate in the equity raisings of those Under this scenario, UBS estimates that ICBC needs Rmb10 billion,
who can generate growth using the capital. But I would be selective in CCB Rmb64.2 billion, BOC Rmb61.5 billion and BoCom Rmb34.1 billion.
investing in those who can wisely use the capital and not rush to us again
for money in the short term,” says Desmond Tjiang, chief investment offi- TAKENFORGRANTED
cer for Asian ex-Japan equities at Fortis Investments in Hong Kong. These are large sums of money. And institutional shareholders do not
want Beijing to assume that they will compliantly pony it up without rec-
THECASEFORCAPITAL ompense.
To the uninitiated, the need for Chinese banks to raise capital might seem For a start, equity raisings on the scale envisaged would probably
odd. mean shareholder dilution – particularly for BoCom and CCB, according
Chinese banks are among the best capitalised in the world. ICBC, to an HSBC report.
CCB, BoC and BoCom all have capital-adequacy ratios above 11%, and The assumption that lending levels will continue to soar makes many
each has tier-one ratios in excess of 8%; healthy by most standards. investors uneasy. Nicholas Yeo, an investment manager with Aberdeen
Yet it is hard to overstate the strain that the breakneck pace of lending Asset Management, has always been cautious about investing in Chinese
over the past year has placed on these banks. banks.
Beijing’s strong-arming of its banks to stoke the economy through “Non-performing loans (NPLs) could arrive in two to three years. We
lending probably means that large amounts have been misallocated, and can’t tell now as things look strong in the next 12 months and the momen-
that non-performing loan levels could well begin to rise. The Bank of tum from the stimulus will still be there…but we have seen from other
International Settlements has its concerns; on December 6 it warned that places that these things take longer to evolve,” he says.
the strong loan growth in China is “not without risks”. Plus there is the opportunity cost of participating in issues from exist-
Added to this, the lending lines of China’s banks could well expand by ing companies instead of new deals from other eagerly anticipated finan-
more than 18% in 2010, according to UBS estimates. The Swiss bank says cial services issuers.
that the largest banks can fund 14% loan growth with internally generat- The most prominent is the Hong Kong IPO of American International
ed capital but they will need more if it exceeds that level. In 2009, year- Assurance of up to US$20 billion. Others likely to come in the next 18 to
on-year loan growth increased by 32% for the 10 listed banks that UBS 24 months include Kyobo Life and Samsung Life, as well as a number of
covers. Indian insurers.
Given these anticipated needs, the China Banking Regulatory “If you’re a broad-based fund manager, you’ll be looking at financial
Commission (CBRC) has ordered the banks to estimate their capital institutions across Asia, looking at the industry and constantly looking at
shortfalls and to come up with capital-raising plans. relative value,” says Rob Jesudason, Credit Suisse’s head of financial insti-
That is likely to increase their capital-adequacy ratios. Reports sur- tutions for Asia-Pacific.
faced on November 23 that the CBRC could make large state banks raise
their CARs to 13%, although the regulator has denied this. Some believe TOUGHDECISIONS
that the CBRC may also demand that banks raise their core tier-one ratio The choice between supporting China’s existing banks and taking expo-
from the current 4% minimum to between 7% and 9%. sure with exciting new issues will play particularly on the minds of cor-
While the banks currently enjoy those levels of core tier-one capital, if nerstone investors such as sovereign wealth funds, large fund managers
loan growth does rise by 20% next year, the 10 listed Chinese banks and insurers and foreign banks.
could need an additional Rmb247 billion to maintain a 9% core tier-one According to a Deutsche Bank report, such major and strategic share-
ratio, notes Andy Brown, head of financial institutions research in Asia at holders already own 5.1% of ICBC, 11% of CCB, 18.6% of BoCom, 72.4%
UBS in Hong Kong. of China Citic Bank, and 20.1% of China Merchants Bank.
ADILUTIONDILEMMA
As China’s largest banks ponder sizeable international businesses. BoA’s existing present an opportunity cost for the UK-
new share offerings, foreign financial stake was cut down by 19.1% after two stake based bank.
institutions still invested in them will have sales this year. RBS and UBS have also “If HSBC has US$10 billion or US$12
to consider their commitments. offloaded their entire stakes in Bank of billion to spend on acquisitions and
Many international banks have stakes in China. suddenly they have to put US$6 billion into
various Chinese lenders. To name a few, That creates a dilemma for institutions BoCom or get diluted down, it creates some
Bank of America (BoA) holds a 10.6% stake that continue to hold stakes in banks that quite interesting questions,” says a senior
in China Construction Bank (CCB); proceed with equity issues. Do they spend banker at an international bank.
Goldman Sachs retains a 3.9% stake in big to retain their stakes at current levels, or Spokespeople from Goldman Sachs and
ICBC; Citi has a 20% stake in unlisted allow themselves to be diluted and risk HSBC would not comment on hypothetical
Guangdong Development Bank and 3.75% provoking Beijing’s ire? questions. Citi and BoA did not respond to
of ShanghaiPudong Development Bank; Some, such as BoA, are already working questions by press time.
while HSBC owns 19.01% of Bank of hard to raise capital to pay back government “HSBC confirms it has no intention to
Communications. investments into their institutions. Reaching reduce its current 19.01% shareholding in
The banks argue that these stakes are into their pockets to maintain equity stakes BoCom. This continued support fully
strategic, and key to their relations with that they have already dropped does not complies with HSBC’s dual growth strategy
Beijing. But this did not stop RBS, UBS, and look likely. for mainland China, comprising organic
BoA from selling down their holdings in While banks such as HSBC have long- growth and long-term investments in
China’s top three state banks in order to stated interests in increasing their presence strategic partnerships,” says a
raise money for their struggling in China, topping up its investment would spokesperson.
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