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China Merchants Bank (CMB) plans to raise up to Rmb35 billion ($5.4 billion) from a rights issue of A- and H-shares as it tries to boost its reserves to meet new capital adequacy requirements. The rights issue will hit the market in September at the earliest, according to a statement the bank made yesterday, adding further to the amount of capital-raising in the financial sector during the second half of this year.
CMB’s rights issue won’t be too big a drain on the appetite for financial sector shares among international investors, however, as only 18.1% of its capital raising, or about $985 million will come from the sale of Hong Kong-listed H-shares. The rest will be raised through the sale of Shanghai-listed A-shares. The bank’s de facto parent company, China Merchants Group, is also expected to take up its 18.63% entitlement in full, although most of that is held in the form of A-shares.
The Shenzhen-based bank said it will offer up to 2.2 rights shares for every 10 existing A- and H-shares, which will result in the issue of approximately 4.75 billion new shares. The deal will need approval from existing shareholders at an extraordinary general meeting on September 9 as well as at two separate meeting for its H- and A-shareholders on the same day.
The subscription price will be set closer to the launch date, but the size of the deal and the ratio of new shares to be issued suggest shareholders will be able to top up their holdings at a significant discount to the current share price. Based on the fact that 18.1% of its share capital are in the form of H-shares, CMB will need to issue about 860.3 million new H-shares, which at yesterday’s closing price of HK$18.14 would be valued at HK$15.6 billion ($2 billion). However, the maximum deal size indicates that only about $985 million will be raised from the H-share portion, which implies a discount of as much as 50% to current prices.
While a lot can happen to the share price between now and launch, that size discount wouldn’t be too different from what CMB offered when it raised $3.2 billion from a rights issue in March last year. At that time, the bank offered new H-shares at a 46.1% discount to the theoretical ex-rights price (Terp) and new A-shares at a 42.7% discount. And that deal was less dilutive for shareholders who chose not to participate, since the bank offered only 1.3 new shares for every 10 existing shares.
It would, however, be well above the discount offered by China Citic Bank on its continuing rights issue, which is priced at a 15.8% discount to the H-share Terp and an 18.3% discount to the latest H-share price before the terms of the offer was disclosed. Citic Bank is raising a combined Rmb26 billion from its rights issue with about 31.8% coming from the H-share tranche and the rest from the A-share tranche. The A-share portion of the deal is already closed and was 99% subscribed, while the H-share offering will stay open until July 25. The deal is arranged by CICC and Citic Securities.
CMB’s H-share tranche will be fully underwritten, although CMB has yet to name the banks that will be involved in the transaction. (Last year’s rights issue was arranged by Bank of America Merrill Lynch, BNP Paribas, J.P. Morgan and UBS). H-share holders will also be able to subscribe to excess shares or, conversely, they can sell their H-share rights in the market in case they don’t want to participate. As per regulations in mainland China, the A-share tranche will not be underwritten and will only proceed if the subscription ratio exceeds 70%.
CMB has been expected to raise new equity capital since its core capital ratio at the end of March was well below new guidelines proposed by the China Banking Regulatory Commission earlier this year. Last week, various media reports suggested that the bank was about to raise between Rmb10 billion and Rmb20 billion from a placement.
According to CMB’s first quarter earnings release, its capital adequacy ratio was 10.91% at the end of March, while its core capital adequacy ratio was 7.66%. The latter is falling short of the new requirement that lenders not viewed as systemically important must have a minimum core capital ratio of 8.5% from 2012. The overall capital adequacy requirement for these banks was raised to 10.5% at the same time.
CMB’s H-share price has been on a declining trend for the past four months, losing about 17.5% amid concerns Chinese banks may face a deterioration of their loan portfolios as the economic growth slows. It is down 22.8% from a high of HK$23.50 in November last year.
Meanwhile, People’s Insurance Company of China Group (PICC) has moved a step closer to becoming a listed company by mandating China International Capital Corp, Credit Suisse and HSBC to help arrange an initial public offering in Hong Kong and Shanghai, sources said. The Chinese insurer is aiming to raise between $5 billion and $6 billion from the dual-listing and given the size of the offering it is likely to add more banks to the line-up as it gets closer to the launch.
PICC, which is the parent company of Hong Kong-listed PICC Property & Casualty, has secured a pre-IPO investment from China’s National Social Security Fund, which in June paid about $1.5 billion for an 11% stake in the firm. Before that investment, the company was wholly-owned by the state.
Other potential deals in the financial sector pipeline for the remainder of this year include a sell-down by Bank of America Merrill Lynch in China Construction Bank, which could total as much as $10 billion; an H-share IPO by China Everbright Bank and a combined A- and H-share listing by China Guangfa Bank, which are expected to raise at least $5 billion each; and a $3 billion to $4 billion A- and H-share IPO by New China Life Insurance.
Citic Securities and China Haitong Securities are both looking to list in Hong Kong, and are expected to raise about $3 billion and $2 billion, respectively, while China Minsheng Bank is planning to issue up to 1.65 billion new H-shares through a follow-on issue. At the current share price, that stake is valued at about $1.5 billion.
