China Merchants Bank Co. plans to raise 34.8 billion yuan ($5.68 billion) in the world’s second-largest share sale this year starting Aug. 26, bolstering its capital as regulatory requirements tighten.
Merchants will offer a total of 3.75 billion Shanghai and Hong Kong-traded shares at 9.29 yuan or HK$11.68 each, it said in regulatory filings yesterday. That represents a 15 percent discount to yesterday’s closing price in Shanghai, or an 18 percent discount to the Hong Kong shares.
The sale will help Merchants Bank, the nation’s sixth largest, plug a capital shortfall and speed up growth as competition with smaller rivals such as China Minsheng Banking Corp. and Industrial Bank Co. intensifies. Chinese lenders have announced plans this year to raise as much as 290 billion yuan from bond and equity offerings as the regulator tightens capital rules and policy makers crack down on short-term financing.
“A stronger capital base will help China Merchants Bank achieve its strategies of increasing loans to small firms and expanding overseas, both of which require significant capital consumption,” said Mu Hua, a Guangzhou-based analyst at GF Securities Co. “China banks’ growth model means they have to replenish capital every few years, though the interval is getting longer with improvement in their earnings ability.”
Shares of Merchants Bank lost 1.1 percent to close at HK$14.02 in Hong Kong, bringing their decline for the year to 18 percent. The bank fell 3.2 percent in Shanghai to 10.56 yuan, giving up earlier gains.
Merchants Bank, which has postponed the sale twice because of approval delays, said July 22 it planned to raise as much as 35 billion yuan.
Merchants Bank’s capital adequacy ratio fell to 10.72 percent as of June 30 from 11.41 percent at the beginning of the year, and its core Tier 1 ratio dropped to 8 percent from 8.34 percent, according to its first-half earnings report. While both measurements are higher than the minimum regulatory requirement, they are among the lowest at Hong Kong-listed mainland lenders.
The bank will use the sale proceeds to strengthen its capital and support business growth, according to yesterday’s exchange filings. A crackdown in June 2013 on off-balance-sheet lending and other credit outside the banking system, known as shadow banking, helped drive money-market rates to a record, cutting off smaller banks’ borrowing on the interbank market.
The cash crunch had an immediate impact on some banks’ operations. Shanghai-based Bank of Communications Co. reduced new lending and temporarily suspended short-term billing financing in June to maintain liquidity, Vice President Yu Yali told reporters Aug. 21.
Larger lenders Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd. have announced plans to raise as much as 60 billion yuan each from new tier-2 capital instruments with a writedown mechanism triggered by a drop in their capital ratios.
Agricultural Bank of China Ltd. plans to sell 50 billion yuan of similar debt, and raise another 40 billion yuan to boost tier 1 capital. Industrial Bank said Aug. 12 it plans to raise 20 billion yuan of supplementary capital.
Japan Tobacco Inc.’s 747 billion-yen ($7.6 billion) offering in March is the largest this year.
Merchants Bank’s sale will improve its Tier 1 ratio by more than 1 percentage point, to more than 9 percent, and boost its share price, May Yan, a Hong Kong-based analyst at Barclays Plc wrote in a note on Aug. 18.