Government and Policy
Banks' rush for capital may trip markets
(Agencies)
Updated: 2009-11-25 09:23
'Room For Innovation'
Chinese banks must keep their capital adequacy ratio -- a key measure of their ability to absorb losses -- above 8 percent by law. But regulators late last year urged small- and mid-sized listed lenders to aim for 10 percent or higher.
The China Banking Regulatory Commission has used various measures to tighten those rules this year and repeatedly warned against reckless lending.
Concerns about new capital raising have weighed on banking stocks since mid-year when the regulator first started signaling its caution.
Shanghai-listed shares of ICBC are up a scant 1.3 percent since mid-year, while Bank of China is up 2.3 percent and China Construction Bank is up 4.2 percent. All those are well behind a 13.2 percent rise for the broader market.
The need for more capital could continue to weigh, and even spread if the broader market cannot absorb the huge sums of new funds required.
"The market has largely priced in expectations of fund-raisings by banks," said Wu Yonggang, analyst at Guotai Junan Securities. "But if regulators suddenly raise ratio requirements ... all banks will be short of capital, and that would scare investors in the stock market."
The looming pressure is already forcing market players to look at other ways of raising capital.
Some of those, including use of debt markets, could provide an opportunity for China to introduce innovative financial instruments, such as bonds with deferrable interest payments, said Liao Qiang, an analyst at Standard & Poor's.
"Compared with overseas markets, China has very limited types of instruments in the debt market that banks can use to replenish capital," Liao said. "There's room for innovation."
Other analysts pointed out the new capital raising could come over a longer period, which would lighten the load on markets.
None of China's dual-listed banks need new equity now, but there may be such a need over the next two to three years, Citigroup said in a November 19 report. Bank of China also said on Tuesday it is studying various ways to raise capital but has no plans for now to do so.
"I think big banks such as Bank of China and China Construction Bank are not in a hurry to raise capital, but it's natural for them to start thinking about it," said Guotai's Wu.
