China's Banks Said to Need $131 Billion of Capital to Meet Stricter Rules

Chinese banks may have to raise about 860 billion yuan ($131 billion) of stock over six years to meet stricter capital rules, according to estimates from the industry regulator, a person with knowledge of the matter said.

Lenders are likely to need an additional 1.26 trillion yuan in supplementary capital by the end of 2016, the person said, declining to be named because the calculations aren’t public. The estimates, compiled in January, assume economic growth of 8 percent a year and 15 percent credit expansion, the person said.

Chinese lenders including Industrial & Commercial Bank of China (601398) Ltd. sold a combined $70 billion of shares last year after record credit expansion fueled concern that their assets might be eroded by bad debts. Banks’ dependence on loan growth to increase profits means they’ll likely have to raise more equity capital, according to Fitch Ratings.

“Capital erosion is a long-term issue facing Chinese banks because they don’t really have the motivation to reduce reliance on loan expansion,” said Wen Chunling, a Beijing-based analyst at Fitch. “The focus of China’s rules is to ensure that banks arm themselves with abundant capital to be well-prepared for a crisis, so that the cost of any government bailout would be minimized.”

Increased Pressure

China’s banking regulator has drafted rules forcing banks to have Tier 1 capital ratios of at least 8.5 percent by the end of 2016, a person with knowledge of the matter said in January. The nation’s lenders had an average Tier 1 ratio of 10.1 percent at the end of last year, according to the watchdog.

That’s below the average 12.3 percent among the world’s 100 largest banks by market value, according to data compiled by Bloomberg.

“Capital is very important for banks’ development,” Jiang Jianqing, chairman of ICBC, said at a Bloomberg TV interview in Sanya, Hainan province, today. “With the ongoing global regulatory reform, banks are facing increased pressure to raise capital. We can always go to capital markets to raise debt or equity. Subordinated debt is an option.”

ICBC doesn’t plan to sell shares until 2012, if possible, Jiang said. The company also doesn’t plan to sell debt “for now,” he said.

The estimates for funding requirements to be met through stock sales account for about 13 percent of the $1 trillion combined market value of China’s 17 publicly traded lenders, according to data compiled by Bloomberg. The forecasts don’t apply to so-called policy lenders like China Development Bank Corp. and Export-Import Bank of China, the person said.

Pace of Fundraising

China’s banking regulator said it has drafted a plan to implement global rules on capital requirements.

“At present, the Regulation on the Management of Commercial Banks’ Capital Adequacy Ratio is still being revised,” the China Banking Regulatory Commission said in an e- mailed response to questions. “After its official publication, each commercial bank will -- based on their own operating conditions -- estimate and decide on the method, pace and amount of fundraising.”

Shares of ICBC dropped 0.9 percent in Hong Kong trading to HK$6.53 as of 11:36 a.m., after earlier falling as much as 1.8 percent. The stock had fallen 8.4 percent last year, compared with a 5.3 percent gain in the Hang Seng Index. Bank of China Ltd. (3988) fell 1.4 percent today, while China Construction Bank Corp. (939) lost 1.1 percent.

Stability Threat

Tier 1 capital comes from equity, retained earnings and hybrid securities such as preference shares. Global regulators have been pushing banks to bolster equity capital after the financial crisis and a real estate collapse in parts of Europe forced governments to amass debt to bail out lenders.

Globally, banks will be required to maintain at least 7 percent core Tier 1 capital ratios, a measure that excludes perpetual preferred stock, the Basel Committee on Banking Supervision said last year. Lenders have until 2019 to phase in the requirements.

While Chinese banks’ focus on domestic loans shielded them from the fallout of the global credit crisis, the CBRC in the past year has stepped up measures to ensure a two-year lending boom that started late 2008 won’t threaten financial stability.

Banks including ICBC, the world’s most profitable lender, have responded by cutting dividend payout ratios, curbing loan growth or expanding non-lending businesses. ICBC, Construction Bank and Bank of China said last month they have no plans to sell more stock for as long as three years.

‘Conservation Buffer’

Under the new rules being considered, lenders must have a minimum 6 percent of Tier 1 capital, up from 4 percent under current regulations. Banks will also be required to hold another 2.5 percent as a “conservation buffer,” the person familiar with the matter said in January.

Lenders considered systemically important would need an additional 1 percent of Tier 1 capital, bringing their total requirement to 9.5 percent, the person said. The nation’s five biggest banks -- ICBC, Construction Bank, Bank of China, Agricultural Bank of China Ltd. (1288) and Bank of Communications Co., are now deemed systemically important, the person said.

Those banks will have to comply with the new capital ratio requirements by the end of 2013, three years earlier than other lenders, the person said in January.

An additional buffer of as much as 2.5 percent that Chinese lenders may be subjected to if credit growth is deemed excessive wasn’t used by the regulator in calculating their fundraising needs, according to the person.

Curtailing Dividends

Lenders will need to increase their Tier 1 capital by about 5.26 trillion yuan over the six years through 2016, of which about 4.4 trillion yuan may come from profits, the person said. The China Banking Regulatory Commission based calculations on earnings rising 12 percent annually and banks distributing 40 percent of net income as dividends, the person said.

China’s five largest banks cut their average dividend payout ratio to about 37 percent last year from 39 percent in 2009, according to data compiled by Bloomberg, as they sought to preserve capital.

The new rules would also require banks to hold a minimum 10.5 percent overall capital adequacy ratio, with systemically important banks needing an additional 1 percent, the person said.

That means lenders will need to raise 960 billion yuan in supplementary capital by the end of 2016, the person said. They may have to raise an additional 300 billion yuan if subordinated bonds and hybrid bonds, which don’t qualify as regulatory capital under the new Basel rules, need to be replaced.

Record Earnings

Chinese banks currently raise supplementary capital by issuing subordinated bonds. In a bankruptcy, holders of subordinated notes receive payment only after other bond claims are paid in full.

China’s lenders boosted combined profit 35 percent to a record 899.1 billion yuan in 2010, the fastest pace of earnings growth in three years, the CBRC said last month.

ICBC plans to increase loans in 2011 at the slowest pace in three years, Jiang last month. Construction Bank, the nation’s second-largest lender, and Bank of China have also said credit growth will slow.

China Merchants Bank Co. will face a “relatively big capital shortfall” over the next five years because of stricter regulatory requirements, Xinhua News Agency reported on April 10, citing comments from the bank’s President Ma Weihua.

--John Liu, with assistance from Liza Lin, Stephen Engle and Christine Hah. Editors: Chitra Somayaji, Philip Lagerkranser

To contact the Bloomberg News staff for this story: John Liu in Beijing at Jliu42@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net

Enlarge image

ICBC Chairman Jiang Jianqing

Qilai Shen/Bloomberg

“Capital is very important for banks’ development,” Jiang Jianqing, chairman of ICBC, said at a Bloomberg TV interview in Sanya, Hainan province, today. “With the ongoing global regulatory reform, banks are facing increased pressure to raise capital. We can always go to capital markets to raise debt or equity. Subordinated debt is an option.”

“Capital is very important for banks’ development,” Jiang Jianqing, chairman of ICBC, said at a Bloomberg TV interview in Sanya, Hainan province, today. “With the ongoing global regulatory reform, banks are facing increased pressure to raise capital. We can always go to capital markets to raise debt or equity. Subordinated debt is an option.” Photographer: Qilai Shen/Bloomberg

1:46

April 13 (Bloomberg) -- Chinese banks may have to raise about 860 billion yuan ($131 billion) of equity through 2016 to meet stricter capital rules, according to estimates from the industry regulator, a person with knowledge of the matter said. Sara Eisen reports on Bloomberg Television's "InsideTrack." (Source: Bloomberg)