Bank of China, the nation's top foreign exchange lender, has asked investment banks to submit proposals to help it raise billions of dollars in new capital, taking a step closer towards its long-awaited capital offering, according to three sources familiar with the matter.
Several banks have pitched for the deal, with UBS seen as a front-runner of a final group of arrangers expected to number around six, one source told IFR, a sister publication of Reuters, speaking on condition of anonymity due to the situation's sensitivity.
Beijing-based Bank of China is weighing plans to raise the money by issuing new shares or convertible bonds, depending on market conditions, said another source, who also spoke on condition of anonymity.
"They haven't decided yet if it will be a direct issue or a convertible bond," said the source.
A third source close to investment banks pitching for the deal said a main drawback to the convertible bond would be a lack of new capital for Bank of China if the buyer decided not to convert the bonds to shares.
Analysts have estimated that China's banks may have to collectively raise about 300 billion yuan to plug holes after their nearly 10 trillion yuan in new lending last year, double the previous year's total, under Beijing's 4 trillion yuan ($586 billion) economic stimulus plan during the global downturn.
No set amount has been determined yet for Bank of China's plan, said the sources.
Two added that 20 billion yuan, equal to about $3 billion, is one amount that's been mentioned so far, but most believe that would only be an initial figure as the bank would require much more to meaningfully raise its capital adequacy ratio.
"They were initially considering raising 100 billion yuan, but the size was regarded as too big," said one of the sources.
Sally Ng and Irene Huang, analysts with Royal Bank of Scotland, estimated that Bank of China may need as much as 68.5 billion yuan of fresh capital to lift its tier-1 capital adequacy ratio to 9 percent by the end of 2012.
Media have reported that Bank of China could push for approval of its plan as early as March when it convenes its annual shareholder meeting.
Chinese banks must keep their CAR — a key measure of their ability to absorb losses — above 8 percent by law, but in reality the banking regulator demands a higher level. Smaller banks are thought to be at the biggest risk, but broader concerns about capital raising have become a major worry weighing on the sector in recent months.
Such concerns have been hobbled Chinese bank stocks, with Bank of China's Hong Kong-listed shares down more than 13 percent from a mid-November peak. Hong Kong shares of ICBC, the country's largest bank, are down more than 8 percent, while shares of China Construction Bank are down 10 percent.
China Construction Bank, China's second largest lender by market capital, has already raised 20 billion yuan via a subordinated bond offering in late December.
China's CITIC Bank, in which Spain's BBVA has a roughly 15 percent stake, said last week it plans to raise up to 25 billion yuan through subordinated and hybrid bonds to replenish its capital base.
Other banks believed to have short-term capital raising needs include Bank of Communications, Shanghai Pudong Development Bank and Hua Xia Bank.
© 2023 Thomson/Reuters. All rights reserved.