China Construction Bank plans $11 billion rights issue

China Construction Bank has joined a growing number of Chinese banks in announcing a cash replenishment plan to shore up a balance sheet that has been eroded by a year-long lending binge. The Beijing-based bank, the world's second-largest lender by market value, plans to raise up to Rmb75 billion ($11 billion) from a rights issue which, if successful, will be the largest offering of its kind in Asia.

CCB will offer 0.7 rights share for every 10 existing A- and H-shares. The price will be no more than Rmb4.50 per rights share, according to a stock exchange filing on Thursday night.

Under the plan, approximately 16.36 billion new shares will be issued, of which 15.7 billion will be Hong Kong-listed H-shares directed to overseas investors. Only 630 million are Shanghai-listed A-shares earmarked for mainland investors. The proposal is pending shareholder and regulatory approvals.

CCB's rights issue announcement follows massive fundraising plans by several of its mainland peers. The Chinese banks all need fresh capital after an unprecedented credit binge last year. This latest announcement will bring the total amount of money sought by the country's four biggest publicly traded banks this year to approximately $26.6 billion.

Industrial and Commercial Bank of China (ICBC) and Bank of China have announced plans to sell $3.7 billion and $5.8 billion worth of convertible bonds, respectively. And Bank of Communications seeks to raise $6.14 billion from a rights offering to holders of its Hong Kong- and Shanghai-listed shares.

In addition, China Merchants Bank raised $3.2 billion in early April through yet another rights offering.

China's four biggest publicly traded banks could face a combined capital deficit of at least Rmb480 billion ($70 billion) over the next five years, ICBC president Yang Kaisheng wrote in an article published in the 21st Century Business Herald (a Chinese newspaper) last month. Given the size of the capital deficit, the banks may find it difficult to rely solely on China's capital markets to fill the gap, Yang said.

His Rmb480 billion estimate only included the extra capital that will be required as a result of steady lending growth. "If we consider the market risks and operational risks, the amount of capital needed will be greater," he wrote. And the capital shortfall could be even more severe if regulatory requirements become stricter, he added.

Analysts say the planned share sale will help CCB meet regulatory requirements of an 11.5 % capital adequacy ratio for the next two to three years. In its latest results announcement, CCB said its CAR slid to 11.44% as of March 31 from 11.7% three months earlier. In the first quarter, its net profit rose 34% from a year ago to Rmb35.16 billion on the back of robust growth in net fees and net income and a decrease in asset impairment losses, it said.

CCB was set up in 1954 to fund the infrastructure of the newly founded People's Republic of China and is the nation's largest provider of property-related loans. At the end of 2009, it had issued around Rmb359 billion of loans to developers and Rmb852 billion of personal home loans, according to its annual report.

Chinese banks extended a record Rmb9.6 trillion of new credit in 2009, nearly double the amount in 2008, as the Chinese government encouraged loans as part of stimulus efforts designed to boost investment and consumption during the global financial crisis.

In the first quarter this year, CCB made Rmb239.8 billion of new loans and mainland banks overall extended a total of Rmb2.6 trillion as economic growth in the world's third-biggest economy accelerated to 11.9%. But that pace is set to slow as Beijing uses a variety of measures to prevent the country's economy from overheating and orders banks to curb lending -- a business that helps generate as much as 80% of the profit for Chinese banks. The move is leading analysts to expect that the banks' strong profit growth may be reaching its limits.

But policymakers understand that when they take business away from the banks, they need to balance things out. Thus they are allowing the banks to take on new businesses, such as securities underwriting and broking. However, those businesses are still very new to Chinese banks and at an infant-stage of development.

The current environment, in which banks must behave like independent commercial lenders but at the same time heed orders from Beijing, has become a complicated one to navigate, Bank of Communications said in a results announcement.

Photo by AFP.