Bank of China Ltd. is seeking 100 billion yuan ($16 billion) from selling preferred stock in the largest fundraising by a Chinese bank in almost four years to comply with stricter capital requirements.
The board of the nation’s fourth-biggest bank by market value approved a plan to sell as many as 600 million of the shares through private transactions on the mainland, becoming the latest Chinese company to issue the securities domestically since the government began allowing them to two months ago. The Beijing-based company plans to sell no more than 400 million preferred shares offshore, it said in a filing yesterday.
The sale follows Agricultural Bank of China Ltd., the country’s third-biggest, which said last week it’s seeking 80 billion yuan from private sales of preferred shares on the mainland. Tighter requirements introduced by the government in 2013 mean China’s four biggest banks will face a capital shortfall of $87 billion under the new rules by 2019, Mizuho Securities Asia Ltd. estimated in a March report.
“The market normally reacts to this type of fundraising slightly positively,” Steven Chan, a Hong Kong-based analyst at Maybank Kim Eng Holdings Ltd., said by phone. “Investors think banks are finding ways to replenish their capital.”
Shares of Bank of China in Hong Kong gained 0.9 percent to HK$3.46 as of 10:46 a.m. local time, compared with the benchmark Hang Seng Index’s 0.2 percent advance. The lender trades for 0.74 times its estimated book value for 2014, compared with its record low of 0.66 reached in March.
A lending slowdown and surging bad loans eased combined earnings growth at the four biggest Chinese banks to 12 percent last year from 15 percent in 2012, curbing their ability to retain profits as capital. Stock valuations close to record lows make it harder for lenders to raise funds through common equity, which dilutes existing shareholdings more than preferred stock.
Last month, Shanghai Pudong Development Bank Co. said it will raise as much as 30 billion yuan and Xinjiang-based Guanghui Energy Co. said it plans to sell 5 billion yuan of the securities.
The preferred securities that are issued by banks through private placements are compulsorily converted into common equity if capital ratios fall below a certain level. For Bank of China, the trigger point is when its core Tier-1 ratio drops to 5.125 percent or below, according to yesterday’s statement.
Bank of China’s Tier-1 ratio fell to 9.59 percent as of March 31 from 9.70 percent in December, while its total financial buffer fell to 12.05 percent from 12.46 percent. China’s banking regulator requires big lenders to maintain a minimum Tier-1 ratio of 9.5 percent and a total ratio of 11.5 percent by the end of 2018.
Maybank’s Chan estimated Bank of China’s preferred stock would boost its capital ratios by 0.85 percentage points. The sale would the biggest fundraising by a Chinese lender since Agricultural Bank’s $22 billion initial public offering in August 2010.
The country’s systemically important banks may see their total capital adequacy ratio fall to 10.5 percent in the event bad loans surge fivefold, according to a stress test by the nation’s central bank last month.
While they are usually accorded fewer voting rights, preferred shareholders have a higher claim on a company’s assets than common stockholders in the event of liquidation. Owners of preferred securities are typically entitled to a fixed dividend before funds are paid to common shareholders.
The lender’s Shanghai and Hong Kong-traded shares have a dividend yield of at least 7 percent, data compiled by Bloomberg show. The dividend rate in the Bank of China sale will be fixed and no higher than the average ratio of the banks’ annual weighted return on equity for the two most recent years, according to yesterday’s statement.
“Bank of China can set a preferred share sale yield just above 6 percent to attract investors,” said Maybank’s Chan. “They don’t need to sell it close to their ordinary share yield. This will be very attractive to investors.”