I’ve largely ignored a steady stream of announcements by China’s big four state-run banks these past few weeks but the latest plans released on the same day from two of those seem like a good opportunity to focus on this exercise that could soak as much as 400 billion yuan (US$63 billion) from the market.
My main reason for ignoring the announcements was because they were too numerous to write about individually and also because much of the fund raising was expected. But the sheer size of this exercise, plus the broader implications for investors, seems like a good reason for writing now.
At the broadest level, this exercise demonstrates just how poorly run the big lenders are, largely because they take most of their orders from Beijing. As a result, most are sitting on huge piles of bad debt due to dubious loans made under Beijing’s 4 trillion yuan economic stimulus plan at the height of the global financial crisis in 2009 and 2010.
What’s more, the banks could be looking at more headaches in the next couple of years as China’s real estate market shows growing signs of heading into a correction.
Let’s look at some of the broader numbers which include the announcements issued this week from Bank of China (03988.HK; 601398.CN) and Agricultural Bank of China (01288.HK; 601288.CN).
That pair, along with top lender Industrial and Commercial Bank of China (01398.HK; 601398.CN), have issued all of the announcements so far, seeking to raise funds through a combination of bond and preferred share issues. The fourth big bank, China Construction Bank (CCB) (00939.HK; 601939.CN), has yet to issue any announcements.
Based on my calculations, the three banks have raised a combined 80 billion yuan so far, all through the issue of tier-2 capital bonds. Based on their statements, the trio are eligible to raise another 225 billion yuan in bonds and preferred shares, bringing the potential total to as much as 305 billion yuan.
If and when CCB announces its plans, the total could rise to as much as 400 billion yuan, or about US$65 billion. By comparison, banks in the United States and European Union that are also recapitalizing after the financial crisis have raised just US$56 billion to date, according to a calculation by Bloomberg.
In May, China approved a plan to let its banks issue preferred shares, in a move that many saw as a vehicle for the government to recapitalize the lenders in anticipation of massive bad debt write-downs.
That strategy seemed prudent since financial markets were unlikely to give the banks more money after several huge share issues after the financial crisis. But the preferred shares will saddle the banks with a new obligation since the holders of such shares are entitled to interest payments.
The Hong Kong-traded shares of all the big four banks initially sagged after the size of the fund raising became apparent in the spring but have rallied since then and now trade nearly unchanged from their levels at the beginning of the year.
Against that backdrop, the only logical conclusion is that the stocks are set for a correction in the months ahead, with the size of the downward pressure determined by how much patience investors have for these companies.
I suspect that many investors will choose to hold their stocks since they know Beijing won’t let the banks’ performance slip too much. But if Beijing decides to let markets play a bigger role and profit erosion is relatively large, we could see a large move out of the stocks.
Bottom line: A massive new fund raising by China’s big four banks could spark a moderate correction in their share price if it results in significant profit erosion.
The writer is a commentator on China company news and an associate professor in journalism.
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