By Soo Ai Peng
September 9, 2010 6:38 PM EDT
Bank of China's Shanghai-listed shares languished on Thursday, reflecting lingering concerns over the health of the sector after the bank obtained regulatory approval for an $8.8 billion share placement in Hong Kong and Shanghai.
China's No.4 bank joined larger rivals, including top lender Industrial and Commercial Bank of China, in tapping investors for billions of dollars for recapitalization after a 2009 lending binge to support the government's economic stimulus.
Chinese banks are expected to raise a total of some $70 billion, also in an effort to meet tighter capital adequacy ratios demanded by regulators to pre-empt a rise in bad loans.
The approval from the China Banking Regulatory Commission (CBRC) for the Bank of China share placement was expected and had muted effect on its Shanghai-listed shares, which fell 0.9 percent in morning trade. Its Hong Kong-listed shares had gained 0.8 percent by 0415 GMT.
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Bank of China's Shanghai-listed stock has fallen more than a fifth so far in 2010, compared with the Shanghai's stock market index .SSE which is down 18 percent year to date.
Its Hong Kong-listed shares have fallen 4.5 percent versus Hong Kong's Hang Seng Index, down 3.6 percent year to date.
"Chinese banks' valuations are considered low now and we think they will stay that way in the immediate term," said Shen Wei, banking analyst at Everbright Securities in Shanghai.
"The low valuations suggest that investors are still worried about banks' asset quality," Shen said.
Shares of Chinese lenders have performed poorly so far in 2010 because investors were worried that the surge in share supply from the fundraisings would dilute earnings and cap share price gains.
Beijing's clampdown on the country's red-hot property sector and heightened scrutiny over banks' exposure to local government financing vehicles have also spooked investors.
About 23 percent of the 7.66 trillion yuan ($1.13 trillion) in loans that banks have extended to these vehicles are at serious risk of default, but 27 percent are generating enough cash flow to pay off the loans, according to some estimates.
Among other state-owned lenders, ICBC entered the bond market last week to raise 25 billion yuan via convertible bonds after the China Securities Regulatory Commission approved the plan last month.
ICBC, the world's biggest bank by market value, also plans to raise up to 45 billion yuan ($6.6 billion) through a rights issue in Hong Kong and Shanghai.
The fund raisings follow Beijing-based Agricultural Bank of China's $22.1 billion initial public offering in Shanghai and Hong Kong.
Most banks have said that the latest round of fundraisings could sustain their normal operations for the next two to three years. Chinese banks rely mainly on the capital-intensive loan business to drive earnings growth. Fee-based income accounts for just a small fraction of their total earnings.
"Chinese banks have a very large base of depositors which makes them an attractive long-term investment," said Mark Mobius, Executive Chairman of Templeton Emerging Markets Group.
"However, we expect an increase in NPLs. But that's not a huge cause for concern at this point in time because the banks are adequately capitalized," Mobius told Reuters recently.
($1=6.794 Yuan)
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