Bond Market Update : China Banks’ Capital Drive

They have hit the street with Basel 3 compliant subs and the supply will continue with Basel 3 perps. Chinese banks are on a mission to boost their capital ratios.

3 weeks ago.

13 Aug.
Agricultural Bank of China, the mainland’s fourth-largest bank by assets and outstanding loans, will issue 30 billion yuan in 10-year bonds, the first tranche of a total of 50 billion yuan approved by the government late last month, according to mainland media.

China Construction Bank, the mainland’s second-biggest bank, plans to issue 20 billion yuan in 15-year bonds, and unlisted policy bank Export-Import Bank of China will issue 13.5 billion yuan in second-tier 10-year bonds
http://www.scmp.com/business/banking-finance/article/1572650/3-big-chinese-banks-issue-635b-yuan-bonds-same-day

Then we have ….

ICBC and Agricultural Bank each plan to sell 80 billion yuan of preferred stock, while Bank of China says it will raise 100 billion yuan. “
http://www.bloomberg.com/news/2014-08-17/china-banks-share-sales-to-damp-profit-in-vicious-cycle.html

Bank of China May Boost Tier 1 Ratio 30 Bps With
Aug 22, 2014 10:34
Bank of China plans to sell $5 billion of tier 1 bonds in various currencies, according to Bloomberg News. The sale, China’s largest offering of tier 1 notes, could raise the bank’s tier 1 capital ratio to 9.67% from 9.37% in June.
The ratio fell 32 bps in 1H because of a jump in risk-weighted assets. The systemically important bank needs a minimum tier 1 capital ratio of 9.5% by 2018. China Citic Bank International issued $300 million of tier 1 notes in April.

SINGAPORE, Sep 2 (IFR) – Bank of China has picked nine banks for its debut issue of offshore Additional Tier 1 preferred shares, according to a banker close to the deal.

The banks are Bank of China International, BNP Paribas, China Merchants Securities, Citigroup, Citic Securities International, Credit Suisse, HSBC, Morgan Stanley and Standard Chartered, the banker said. BOCI is leading the process.

Bank of China is aiming to wrap up the deal before the end of October, the source said. Multiple currencies are being considered, including US dollars, euros and offshore renminbi, he added.http://www.reuters.com/article/2014/09/02/emergingmarkets-bonds-idUSL3N0R32KW20140902

Can I say I like what I am seeing ?

The big 4 state controlled commercial banks in China :

  • Bank of China 3988 HK – current gross divd 6.68% P/E 4.9 Price HK 3.65
  • China Construction Bank 939 HK – current gross divd 6.44% P/E 5.12 HK Price HK 5.81
  • Industrial and Commercial Bank of China 1398 HK – current gross divd 6.29% P/E 5.32 Price HK 5.19
  • Agricultural Bank of China 1288 HK – current gross divd 6.08% P/E 5.29 Price HK 3.62

I mentioned the dividends 6 weeks back in Dividends Matter Too – Top Banking Dividend Stocks. https://tradehaven.net/market/dividends-matter-too-top-banking-dividend-stocks/

We see mighty rough headlines for Chinese banks these days and nasty headlines on the property bubble there. The latest being RBA’s Stevens comments that China’s weakening property markets will pose a challenge to both China and …. of course, Australia.

The facts are dire.
* China’s big 5 banks (including privately held Bank of Communications) have written off US 7.57 bio in bad loans for 1H14, double the amount the prior year .
http://online.wsj.com/articles/china-state-banks-report-surge-in-soured-loans-1409320957
* Trust companies are struggling to roll over their debt sparking a mini crisis in China’s shadow banking industry and banks have found themselves responsible to the depositors who had bought the trust products through the banking counters.
http://www.bloomberg.com/news/2014-08-27/pboc-resolve-tested-as-6-trillion-shadow-banking-industry-sours.html

Thus it could be premature to entertain the idea of buying the stocks just for the dividend yields so why not a slightly safer instrument in the perpetual, especially if it delivers the same level of dividends ?

And if a large chunk of income will now go to servicing the new debts, perhaps dividend yields will drop going forward ?

Yes. Basel 3 compliant perps have loss sharing features which is gives about just a little less risk than the stock. And we have seen some losses imposed around the world on even the senior bondholders as the recent case in Brazil which I mentioned in Pink Slime and Defaults Are Back, where the central bank imposed losses on the senior bondholders of African Bank Investments. https://tradehaven.net/market/pink-slime-and-defaults-are-back/

These are the risks you need to confront when you want to settle for 7% instead of 0%.

If you are comfortable with it, the timetable looks like BOC will hit the streets first.

BOC and ABC have both gotten approvals from the CBRC (China Banking Regulatory Commission) for their Basel 3 compliant preferred share issuance plans.

Size ?
BOC has CBRC’s approval to issue onshore pref shares of up to RMB 60 bio and offshore Alt Tier 1 of up to US$6.5 bio.
ABC has CBRC’s approval to issue pref shares of up to RMB 80 bio but did not specify if an offshore issue will take place.

ICBC is slightly behind with their plans to tap the offshore for up to RMB 35 bio but would need a resolution by EGM on 19 Sept before applying to the CBRC.  Both have yet to get the CSRC (China Securities Regulatory Commission) approval. 

Coupon ?
I am hearing BOC Alt Tier 1 at 6.5-7% from unverified sources. A month ago, I was informed it would be on the higher side of 7%. So rumours adrift here.

Lots of interest, however, both from PB and institutions and as such, we could see an even lower coupon. <sob sob>

Ratings
If we go by the usual 6 notch lower, we will be seeing the perps rated at BB+ from the senior issue’s A1 rating.

Finally, I leave some Coco levels for comparison.

COCO RUN