Industrial and Commercial Bank of China (ICBC) has confirmed that it too will be opting for a rights issue of up to Rmb45 billion ($6.6 billion) instead of a follow-on share sale to the wider investment community, mirroring the plans by Bank of China (BOC) and China Construction Bank (CCB).
The preference for a rights issue has been known in the market for some time, but hasn't been confirmed by ICBC until now.
The shift comes after Beijing expressed a wish not to have its holdings in the banks diluted. The government controls about 35.4% of ICBC through state-owned investment company Central Huajin Investment, which also owns 67.5% in BOC and 48.2% in CCB.
In other words, the decision to go with a rights issue isn't believed to have anything to do with the potential investor appetite for the deal -- in fact, Agricultural Bank of China (ABC) said yesterday that it has exercised the overallotment option on the H-share portion of its initial public offering, suggesting there is still strong interest in Chinese financial stocks among international investors.
However, the fact that BOC, ICBC and CCB will now offer the new shares primarily to existing shareholders, has taken some pressure off the sector and allowed share prices to bounce back from their lows in May. Including ABC's IPO, China's four largest state-owned banks are seeking to raise a combined $48.5 billion this year and if you add in earlier rights issues from China Merchants Bank and Bank of Communications, the amount increases to $56.5 billion.
The exercise of the overallotment option on ABC's H-share tranche will boost the proceeds from this tranche to $12 billion from $10.4 billion and the size of the combined A- and H-share IPO to $20.8 billion. If it decides to exercise the 15% overallotment option, also known as a greenshoe, on the A-share tranche as well, the deal will swell to about $22.1 billion and achieve ABC's hopes that the IPO will be the largest in the world ever.
For now, the H-share greenshoe propels it passed Visa's $19.7 billion IPO in March 2008 into second place, but it still trails ICBC's record $21.9 billion listing in October 2006.
Although the bank had until mid-August to decide what to do with the greenshoe, the exercise came as no surprise after ABC's H-share price has pushed higher over the past week -- especially in light of the bank's widely-known desire for a world record.
After gaining for six straight days, the stock closed at HK$3.58 on Wednesday -- up 11.9% versus the HK$3.20 IPO price and its highest closing level since the debut on July 16. Yesterday, after announcing that the shoe had been used in full, it fell 1.4% to HK$3.53 but remains 10.3% above the listing price.
The A-share has had a tougher start with a gain of just 0.75% on day one, and as of yesterday it closed 5.6% above the Rmb2.68 IPO price at Rmb2.83. However, expectations are that ABC will exercise the A-share greenshoe in full as well - and attain the wanted record with a final deal size of approximately $22.1 billion.
Meanwhile, ICBC said it plans to offer 0.6 rights shares for every 10 existing shares, for a total of 20.04 billion new shares. Based on the number of outstanding shares, about 75.1% of the rights issue will be in the form of Hong Kong-listed H-shares, while the remaining 24.9% will be covered by new A-shares.
The offering price, which will be the same for the A- and H-share tranches adjusted for the exchange rate, will be set closer to the time of the issue and as always will depend on the market conditions at the time. With BOC - and perhaps CCB as well -- expected to complete its rights issue ahead of ICBC, the size of the discount versus the market price may also depend on the demand for those other deals. So far, there has been strong interest for Chinese bank paper this year, with the already completed rights issues for China Merchants Bank and Bank of Communications both seeing strong excess subscriptions. Also, Huijin is expected to take up its entitlements in full in all three rights issues.
ICBC said in the statement yesterday that the H-share portion of the deal will be fully underwritten. The bank has previously mandated BNP Paribas, BOC International UBS and its own investment banking arm, ICBC International, for the H-share portion the offering. BNP Paribas, BOC International UBS and its own investment banking arm, ICBC International, for the H-share portion the offering.
As is the usual practice in China, the A-share portion will not be underwritten and will need an acceptance rate of at least 70% in order to proceed.
The rights issue will need approval from the holders of both the A- and H-shares, which will be sought at an extraordinary general meeting on September 15. This by itself suggests that ICBC's offering will come after BOC since the latter is seeking shareholders approval for its rights issue already on August 20. CCB's shareholders approved the rights issue in June.
The Chinese banks are all rushing to replenish their equity capital following an unprecedented lending binge last year and to ensure they can continue to grow their loan books and still adhere to the government's capital requirements. At the end of the first quarter, ICBC had a capital adequacy ratio of 11.98% and a core capital adequacy ratio of 9.5%. This was down from 12.36% and 9.9% at the end of December, although both measures still met the regulatory requirements.
BOC has mandated Bank of America Merrill Lynch, BOCI, CCB International, Credit Suisse and ICBC International for the H-share portion of its rights issue. It is planning to offer 1.1 rights shares for every 10 existing shares for a total deal size of up to Rmb60 billion ($8.8 billion). Based on the number of outstanding shares, the A-share portion will account for about 70% of the offering, while the H-share portion will make up the remaining 30%.
And, according to sources, CCB last week mandated six banks -- Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley, CCB International, China International Capital Corp and Citic Securities -- for a rights issue that could raise up to Rmb75 billion ($11 billion). The bank will offer 0.7 rights shares for every 10 existing A- and H-shares, according to a stock exchange filing in late April. 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. Shareholders approved the proposal in June.
