Bocom Recapitalizes, Govt Pays the Bill 交行再融资或掀起新一轮银行再融资热潮

By newsdoug on March 16, 2012

The latest round of capital raising by major Chinese banks continues with the news that Bank of Communications (HKEx: 3328; Shanghai: 601328), the nation’s fifth biggest lender, has just recapitalized to the tune of $8.9 billion. But in a telling sign that investors have tired of this latest round of fund raising, the government has stepped in to pay most of the bill this time, setting a pattern for a growing number of bank recapitalizations likely to happen in the months ahead. In many ways, it’s only appropriate that Beijing help these banks bolster their finances, as the current weakness in their balance sheets is the direct result of their compliance with a government’s directive that saw them make record loans under a national economic stimulus package at the height of the global downturn in 2009 and 2010. In this latest development, BoCom has just raised a hefty $8.9 billion through a private placement with a group of buyers mostly linked to major state-owned entities, including the finance ministry, the national pension fund, and China’s state-owned tobacco monopoly. (English article) While ordinary shareholders won’t have to pay for this recapitalization directly, they will still pay indirectly through the dilution of their holdings in BoCom, which will issue millions of new shares as part of this private placement. BoCom is just the latest in a string of Chinese banks and other financial institutions to raise major new capital over the last year, as most race to strengthen their overextended balance sheets after the lending binge of 2009 and 2010. Many worry the banks’ finances could come under further pressure as many of the questionable loans made during that period end up defaulting, though the government is also taking steps to try to avoid that situation by allow banks to delay collection of repayment on many of those loans. (previous post) Other banks to announce big new fund-raising plans over the last year include Minsheng Bank (HKEx: 1988; Shanghai: 600016), which just last month announced plans to raise up to $1.6 billion, as well as leading lender ICBC (HKEx: 1398; Shanghai: 601398) and China Merchants Bank (HKEx: 3968; Shanghai: 60036). (previous post) Analysts previously said that BoCom was likely to need more money, and also mentioned Agricultural Bank of China (HKEx: 1288; Shanghai: 601288) as another top bank that could need new capital in the near future. Any investors with a memory will recall that this latest round of capital raising comes just 2 years after a similar massive round that saw the nation’s major lenders raise more than $100 billion collectively to improve their weak finances. Of course if someone was giving me billions of dollars in new capital every 2 or 3 years, I could probably also run a bank that looked very profitable on paper! But unfortunately, I have no benefactor like the Chinese government or investors who like the China banking story, which is looking increasingly unattractive with the announcement of each new fund raising plan.

Bottom line: BoCom’s new fund raising plan is the latest from China’s banking sector, with more likely to come this year as Beijing shows growing willingness to pay the bill.

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