China issued rules for a trial program allowing companies to sell preferred stock, expanding financing options for the nation’s banks as they seek to address tougher capital requirements.
Companies can issue the shares if they are included in the Shanghai Stock Exchange 50 A-Share Index, the China Securities Regulatory Commission said in a statement on its verified microblog account yesterday. Publicly traded companies can also issue preferred stock to pay for acquisitions and buy back shares, the CSRC said.
Lenders including Industrial & Commercial Bank of China Ltd. account for at least 34 percent of the A-share index. Chinese banks said last year that they plan to issue new types of debt and equity securities to raise funds following tighter capital requirements that took effect in January 2013.
“This is very good news for banks,” Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp., said by phone. “It has become increasingly difficult for banks to raise capital by selling common shares on the secondary market as valuations have declined steadily in the last two years.”
Increasing competition for deposits and rising bad loans have dragged the Hong Kong-traded stocks of the nation’s four biggest banks including ICBC down by more than 12 percent this year. The shares were valued on March 13 at a mean 0.94 times net assets, or book value, the lowest level since Agricultural Bank of China Ltd.’s initial public offering in 2010, data compiled by Bloomberg show.
Preferred shareholders have a higher claim on a company’s assets than common stockholders in the event of liquidation. While they are usually accorded fewer voting rights, owners of preferred stock are typically entitled to a fixed dividend before funds are paid to common shareholders.
Publicly traded companies are barred from issuing preferred shares convertible into common equity, the CSRC said. Banks are exempted if capital ratios drop below a trigger level, it said. The watchdog and the CBRC will issue rules regarding the compulsory conversion of banks’ preferred shares into common shares.
China’s new capital rules require systemically important banks to have minimum capital buffers of 11.5 percent before the end of 2018, according to the China Banking Regulatory Commission. For banks that the regulator doesn’t classify as systemically important, the requirement is 10.5 percent.
The banking industry’s capital adequacy ratio was at 12.19 percent at the end of December down from 12.28 percent at the end of last March, according to CBRC data.
China’s publicly traded banks need to raise as much as 500 billion yuan ($80.3 billion) next year to replenish Tier 1 capital, a gauge of financial stability, according to Liu Jun, an analyst at Chang Jiang Securities Co. in Wuhan city.
Chinese banks mostly rely on issuing common stock and retained earnings to replenish their Tier 1 capital, Liu wrote in a December report. Due to slowing profit growth, expanding loan books and poor valuations, lenders are “badly in need” of preferred stock as a Tier 1 capital alternative, he said.
Increasing the Tier 1 capital ratio by 50 basis points would hurt earnings by just 1.1 percent when issuing preferred shares, compared with a 4.5 percent dilution from common equity, Michael Werner, a Hong Kong-based analyst at Sanford C. Bernstein & Co., wrote in a report in October.
Issuing preferred stock won’t dilute per-share earnings or hurt stock valuations for banks as holders aren’t entitled to distributable profits of a company, Chang Jiang’s Liu said.
ICBC, the nation’s largest bank by assets, last year approved a plan to raise as much as 60 billion yuan in 2014 by selling so-called Tier-2 securities, a type of debt that will include conditions for a forced writedown on the principal.