China Merchants Falls After Shanghai Share Sale Approved

China Merchants Bank Co. fell by the most in almost two weeks in Shanghai after winning approval for a share sale that may be the largest by a Chinese lender since 2011 as the industry moves to shore up capital.

The shares dropped as much as 3.4 percent to 10.68 yuan, the steepest intraday decline since July 12, and traded at 10.86 yuan as of 2:17 p.m. local time. They declined 1.6 percent to HK$13.32 in Hong Kong. A gauge of financial stocks in the CSI 300 Index of the biggest companies traded in Shanghai and Shenzhen slumped 2.5 percent, the most of 10 industry groups.

Merchants Bank will sell about 3.07 billion new shares in Shanghai “as soon as possible” because approval from the China Securities Regulatory Commission will expire in six months, the Shenzhen-based lender said in a statement to the Shanghai exchange yesterday.

The approval follows a crackdown on short-term financing last month that’s tightened liquidity among the nation’s lenders. The June cash crunch, China’s worst in at least a decade, exposed smaller banks’ reliance on financing such as wealth management products, savings vehicles that offer interest higher than the central bank benchmark, to fund growth.

“Merchants Bank’s rights issue may spur market worries about another wave of refinancing on the markets,” Shenyin & Wanguo Securities Co. analysts Ni Jun and Xu Bingyu wrote in a note today. “This will weigh on banks’ valuations in the short term.”

Low Valuations

The CSI 300’s financial index, which also tracks property developers and insurers, trades at a record low of 6.3 times 12-month projected profit, according to weekly data compiled by Bloomberg going back to 2007. China Merchants Bank is valued at 4.8 times, also an all-time low, the data show.

Industrial Bank Co., which trades for 3.8 times profit, sank 2.2 percent in Shanghai. Huaxia Bank Co., valued at 3.9 times, slumped 2.9 percent, the most in almost two weeks.

China’s lenders may need to raise $50 billion to $100 billion over the next two years to maintain their capital ratios as policy makers speed up a plan to have interest rates set by the market, according to Shanghai-based research firm ChinaScope Financial.

China Merchants’ Shanghai share sale plan may raise about 30.55 billion yuan, according to Shenyin & Wanguo. That would make it the largest since China Construction Bank Co. raised 41.9 billion yuan in November 2011, according to data compiled by Bloomberg. Industrial Bank Co. raised 23.67 billion yuan from a stock sale in January this year.

Merchants Bank extended a plan to raise as much as 35 billion yuan ($5.7 billion) in Shanghai and Hong Kong by a year from Sept. 8, it said earlier this week.

The People’s Bank of China on July 20 ended a floor on borrowing costs previously set at 30 percent below the benchmark, in the biggest step yet by China’s new leaders to move the nation’s financial system toward market-set rates.

— With assistance by Aipeng Soo

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