AgBank of China Plans to Raise $12.8 Billion in Capital

Agricultural Bank of China Ltd. is seeking 80 billion yuan ($12.8 billion) in the nation’s biggest sale of preferred stock since the government began allowing companies to issue the securities two months ago.

Its board approved a plan to sell as many as 800 million preferred shares through private transactions on the mainland, the Beijing-based lender, the nation’s third biggest by market value, said in a Hong Kong stock exchange statement yesterday.

The sale would bolster Agricultural Bank’s capital position, which is the weakest among China’s top five lenders, and allow it to conform to stricter requirements introduced by the government in January 2013. 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.

“Agricultural Bank’s sale will test the waters for investors’ interest in preferred shares,” Yuan Lin, a Beijing-based analyst at BOC International Holdings Ltd. said by phone today. “It would ease Agricultural Bank’s capital constraints.”

Yuan has a buy recommendation on the shares, which rose 0.9 percent to HK$3.28 in Hong Kong as of 10:22 a.m. local time. The benchmark Hang Seng Index gained 0.2 percent. The stock fell 14 percent this year, compared with the Hang Seng’s 6.1 percent loss.

Stock Conversion

Preferred shares, available under a trial program approved by regulators two months ago, permits banks to raise capital without selling common equity. The securities that are issued by banks through private placements can be converted into common stock if capital ratios fall below a certain level.

Agricultural Bank is the third company to propose a preferred stock sale. Last month, Shanghai Pudong Development Bank Co. said it will raise as much as 30 billion yuan, while Xinjiang-based Guanghui Energy Co. said it plans to sell 5 billion yuan of the securities.

Under the new rules, systemically important banks need to have a minimum Tier 1 ratio of 9.5 percent, with overall buffers of 11.5 percent before the end of 2018, according to the China Banking Regulatory Commission.

Agricultural Bank’s capital adequacy ratio was 11.87 percent at the end of March, while its Tier 1 ratio was 9.48 percent. Both levels are the lowest among the five biggest Chinese banks, data compiled by Bloomberg show.

Capital Buffer

After the sale, Agricultural Bank’s Tier 1 and total capital ratios may rise by about 0.83 percentage points, based on its capital levels at the end of 2013 and assuming a 6 percent coupon rate, according to the statement.

“Issuance of preferred shares removes concerns on Tier 1 capital shortfalls,” Irene Huang, a Hong Kong-based analyst at UBS AG, wrote in a note yesterday. “But it has limited loss absorption before common equity. We believe this news is well known by investors and has been largely priced in.”

Agricultural Bank said it plans to sell the first batch of securities within six months after getting regulatory approval and the rest in the next 24 months. The preferred stock may be converted into ordinary yuan-denominated shares if the bank’s common equity Tier 1 ratio drops to 5.125 percent or lower.

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.

Profit Decline

Sales of the securities are unlikely to significantly boost banks’ stock prices because the industry is facing a downturn in profitability amid a deregulation of interest rates, Grace Li, a Shanghai-based analyst at Ping An Securities Co. wrote in a note today.

Combined profit at the four biggest Chinese banks rose 12 percent last year, down from a 15 percent increase in 2012. Declining earnings growth and rising defaults at the largest lenders have curbed their ability to retain earnings to fulfill capital requirements.

China’s systemically important banks may see their 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.

— With assistance by Jun Luo

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