Banks announce plans to boost capital

09:11, January 10, 2011      

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After last year's lending expansion and wave of refinancing, China Minsheng Bank and Agricultural Bank of China recently announced fresh plans to increase their capital to meet regulatory requirements.

China Minsheng Bank expects to raise about 21.5 billion yuan ($3.24 billion) through a rights issue to seven original shareholders including China Life Insurance Co and family-held enterprises such as Shanghai Giant Life Tech Co and foodstuff producer New Hope Group, according to its filings with the Shanghai Stock Exchange.

The funds are to meet regulatory requirements for expansion. Currently, large commercial banks need to hold 11.5 percent as total capital adequacy ratio and 10 percent as core capital adequacy ratio.

These are higher than those stipulated under Basel III norms, which set a minimum of 10.5 percent for overall capital adequacy and 7 percent for core capital adequacy ratio.

Capital adequacy ratio is the bank's capital including shareholders' equity, retained earnings and supplementary capital such as subordinated debt, against its risk-weighted lending assets.

China Minsheng Bank's overall capital adequacy ratio was 10.81 percent and core capital adequacy ratio was 8.34 percent by the third quarter of last year, slightly lower than the regulatory requirement.

The board of Agricultural Bank also resolved Friday to issue subordinated debt of up to 50 billion yuan ($7.54 billion) to improve their capital adequacy ratio, which was 11.38 percent by the third quarter of 2010.

Following the lending spree over the last two years, China's banking regulators had raised the bar for capital adequacy ratio as a precaution against systemic risks associated with increased lending.

Last year, 11 listed banks including large ones such as Industrial and Commercial Bank of China and Bank of China refinanced funds totaling over 400 billion yuan ($59.48 billion), according to business portal caixun.com.

This year, the China Banking Regulatory Commission has reportedly placed more banks on the list for strict supervision against systemic risks, which triggered the market speculation over a fresh round of refinancing.

The scale of refinancing, however, would be less than last year given the lower estimate of new lending expected this year, Chen Xuebin, a finance professor with Fudan University, told the Global Times.

"Many large banks had already refinanced last year's debts, and lending growth for this year is expected to slow down, and, therefore, the banks will be under less pressure to raise capital," he said.

After last year's new lending of an estimated 8 trillion yuan ($1.21 trillion), most market observers foresee that this year's lending may not exceed 7 trillion yuan ($1.04 trillion).

The default risks associated with the lending expansion can be controlled as long as China's economy remains strong, Chen said.

Source: Global Times
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