China’s listed banks are turning to preferred stock issues to improve their capital asset ratios as regulators toughen up their adequacy tests.
According to analysts as authorities push for financial deleverage, listed banks are turning to the issuance of preferred stock to beef up tier-1 capital, as well as convertible bonds that can be triggered in six-months time to supplement core tier-1 capital.
At the end of March China Zheshang bank issued USD$217.5 billion in preferred stock via Hong Kong, while Jiangsu Changshu Rural unveiled plans for a convertible stock offering of more than 3 billion yuan, and Bank of Wuxi announced plans to released up to 3 billion yuan in A share convertible bonds.
Bank of Wuxi also announced plans to release up to 3 billion yuan in tier 2 capital instruments, while board of China Construction Bank approved an issuance of tier 2 capital instruments worth up to 96 billion yuan.
Since then other major lenders including Bank of Jiangsu and China Merchants bank have proposed non-major issuances of preferred stock to beef up capital.
Analysts point out that supervision and regulation of the capital adequacy of financial institutions is becoming increasingly strict as part of efforts to spur financial deleveraging, compelling banks to turn to measures such as non-public preferred stock issues, public issuances of convertible bonds and tier-2 capital instruments to beef up capital.
Wang Yifeng, vice-chairman of the Financial Development Research Center of China Minsheng Bank’s Research Group notes that the cost of preferred stock is around 5%, while tier 2-capital instruments are a cheaper means of raising funds and convertible bonds the cheapest.
Analysts note that CCB’s approval of the issuance of 96 billion yuan in tier-2 capital instruments is of considerable size, and comes in response to a dip in its capital adequacy ratio.
CCB’s 2016 capital adequacy ratio report states frankly that its CAR fell as full year net capital growth fell behind expansion in risk-weighted assets, as a result of sub-grade debt