AgBank Leads New Fund-Raising Charge
Observers who were overwhelmed by Chinese banks’ fund-raising frenzy after the global financial crisis should get ready for something much bigger, with word that Agricultural Bank of China (HKEx: 1288; Shanghai: 601288) is planning to raise a massive $12.8 billion as a new round of money-raising kicks off. China’s banks are notorious for lending in line with directives from Beijing, with the result that they often make poor decisions based on political rather than commercial factors. That reality means that most major Chinese lenders are now sitting on mountains of questionable loans, and the situation could get much worse as the nation’s real estate bubble shows early signs of finally getting ready to burst.
I remember working in Hong Kong when China’s big banks embarked on their first big wave of capital raising in 2010 and 2011 after a lending binge to support Beijing’s massive economic stimulus plan during the global financial crisis. During that time, me and my colleagues watched as nearly all the big banks announced major new fund-raising plans, usually ranging from $2 billion all the way up to $5 billion.
Those schemes all look quite small compared to AgBank’s newly announced plan to raise 80 billion yuan, or about $12.8 billion, through the issue of preferred shares. (English article) The sale would mark the largest of its kind since Beijing officially approved a scheme 2 months ago that will allow banks to issue such preferred shares in a bid to raise their capital cushions.
AgBank said it will raise the funds by selling the preferred shares to domestic investors through private transactions. That sounds like code-speak for saying that most or all of the shares for this recapitalization will be purchased by state-run entities, including AgBank’s controlling shareholder Central Huijin. That shouldn’t come as any surprise, since true private investors long ago lost interest in helping to fund the policy-oriented lending of these massive banks.
AgBank is the weakest of China’s major banks, though I fully expect we’ll see the nation’s other top lenders announce similar plans in the next few months. If the AgBank plan is a good indicator, we could see the banks raise up to a whopping $100 billion combined, with most of that money coming from state-run entities. That seems only fair, since Beijing’s policy directives are the direct cause of the banks’ current weak position.
From a purely logistical standpoint, this preferred share scheme seems like the best way for Beijing to recapitalize the banks without undermining their publicly traded shares. Preferred shares have qualities of both stocks and bonds, but can’t be publicly traded and won’t dilute the ownership of the banks’ listed shares in Hong Kong and Shanghai. In past fund-raisings, the banks often used share rights issues that forced existing stockholders to provide more money or risk seeing their stock diluted.
Shareholders seemed to welcome the new scheme that will see Beijing pay the bill for the new fund raising. AgBank’s Hong Kong-listed shares were up 0.6 in early trade after the announcement, while shares of industry leader ICBC (HKEx: 1398; Shanghai: 601398) were up by a similar amount.
From my perspective, this news really looks like more of the same old behavioral patterns and doesn’t change my view on Chinese banks as an investment. Anyone who buys shares in the banks should expect the stocks to perform modestly well during good economic times, and for Beijing to come to the rescue in times of crisis. This latest rescue plan will prevent the stocks from dropping too much when the bad loans finally start to balloon, but I wouldn’t expect too much upside from the group over the next 2 years.
Bottom line: AgBank’s new preferred share issue is Beijing’s latest attempt to rescue the nation’s banks from a looming bad debt crisis, and similar issues are likely soon from all the other major banks.
Related posts:
