By V. Phani Kumar, MarketWatch
HONG KONG (MarketWatch) -- Industrial & Commercial Bank of China Ltd.'s decision to raise funds and top up its already high capital levels has caught markets by surprise, with analysts describing the move as defensive and meant to end speculation about capital-raising.
But while the end of uncertainty may spell good news for ICBC's stock, which has severely underperformed the Hong Kong market this year, the action may also pressure shares of other lenders that aren't as well capitalized on worries they may advance their own fundraising plans, analysts said.
"It may be a surprise that possibly the best-capitalized bank in China is seeking to raise capital. In our view, this is likely a pre-emptive move to build up a 'war chest' for future growth and write off concerns on capital once and for all," HSBC analysts led by Todd Dunivant wrote in a report released Friday.
"This may put pressure on peers who haven't announced capital raising after the vigorous growth in 2009," they said.
China's second-largest lender by assets, China Construction Bank Corp. /zigman2/quotes/207732534/composite CICHY +1.20% /zigman2/quotes/208974133/delayed HK:939 -1.18% /zigman2/quotes/208058581/delayed CN:601939 -0.81% , which announces its 2009 results later Friday, is expected by some to also announce fundraising plans, given that it's one of the few large listed Chinese lenders that hasn't announced capital-raising plans as yet.
Many analysts had expected that larger banks with a strong capital buffer, such as ICBC and CCB, might only face the need to raise capital in 2011 or beyond.
ICBC's /zigman2/quotes/201401473/delayed HK:1398 -1.48% /zigman2/quotes/202525815/delayed CN:601398 -0.61% /zigman2/quotes/204265987/composite IDCBF +2.94% Tier 1 capital, which consists of common share equity capital and retained earnings, stood at 9.9% of its assets at the end of last year -- among the highest capital level for any major bank of its size.
Although Chinese banks generally have higher capital ratios than their peers in the West or even in other developing countries, many are keen to replenish that capital in the wake of a surge in loan growth in recent years.
ICBC, China's largest by assets and market capitalization, announced Thursday that it planned to raise as much as 25 billion yuan ($3.7 billion) by issuing bonds than are convertible into the lender's Shanghai-listed A shares.
An even bigger surprise was the ICBC board's approval for also raising funds from an equity issuance in Hong Kong. Although specific details on size and timing weren't announced, ICBC said it the issuance won't exceed 20% of its outstanding H shares.
The 20% limit translates into a maximum issuance of 16.6 billion shares, based on ICBC's outstanding shares in Hong Kong. If it issues that many new shares, it will be able to raise nearly 94 billion Hong Kong dollars ($12.08 billion), based on its current price.
ICBC's Chairman Jiang Jianqing has said the lender will "keep a close eye" on market conditions and that it isn't "in a rush to raise capital," given ICBC's strong capital adequacy.
But despite such remarks, the fundraising plans are drawing some concerns.
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"For a bank with 9.9% core Tier 1 [capital ratio] and which prides itself on growing less than the market, lifting Tier 1 by 1.2% to 1.4% seems rather high. Also, it will dilute earnings by 5% and return-on-equity by 1%," Credit Suisse wrote in a report.
"And placing $11 billion to $12 billion may not be easy, depending on market conditions," they said, adding that an amount of equity that large "seems inordinately high."
Among other Chinese banks, Bank of China Ltd. has already announced plans to raise up to 40 billion yuan from a convertible bond issue in Shanghai, in addition to a share sale for up to $7.9 billion in Hong Kong. Bank of Communications Co., China Merchants Bank Co. /zigman2/quotes/209899244/delayed HK:3968 -6.04% /zigman2/quotes/210188047/delayed CN:600036 -2.52% /zigman2/quotes/209895294/composite CIHHF +0.40% and Shanghai Pudong Development Bank Co. /zigman2/quotes/204296742/delayed CN:600000 -0.32% are among other lenders that have already announced fundraising plans.
Still, a broad rally Friday managed to hold back fundraising fears for the time being.
In Hong Kong's morning session trading, shares of ICBC climbed 0.4% in Hong Kong, while China Construction Bank slipped 0.2%. Bank of China advanced 0.8% and Bank of Communications /zigman2/quotes/207155262/delayed CN:601328 -0.44% /zigman2/quotes/203442771/delayed HK:3328 -4.19% /zigman2/quotes/208048873/composite BKFCF -7.41% gained 0.2%.
In Shanghai, ICBC rose 1% and CCB added 1.3%, with BOC /zigman2/quotes/201568493/composite BACHY +1.56% /zigman2/quotes/204682472/delayed HK:3988 -1.65% /zigman2/quotes/202525815/delayed CN:601398 -0.61% adding 1.9% and BoCom climbing 2%.
Many of these banks have underperformed the broad market in recent weeks on worries about Chinese monetary tightening. Shares of ICBC have dropped more than 12% so far in 2010, as compared to the 4.9% drop in the Hang Seng Index. During the same period, BOC has lost 5.5%, CCB has shed 9.1% and BoCom has given up 5%.
In wider market activity on Friday, Hong Kong's Hang Seng Index advanced 0.4% and China's Shanghai Composite rose 1.3%, with Australia's S&P/ASX 200 dropping 0.2%, Japan's Nikkei 225 climbing 1.1% and India's Sensex adding 0.4%.