March 27, 2017 / 1:50 AM / 5 months ago

Zheshang leads next wave of China bank capital

HONG KONG, March 27 (IFR) - China Zheshang Bank last week became the first Chinese bank to issue US dollar Additional Tier 1 securities this year, paving the way for other mainland lenders to raise capital overseas.

Zheshang's $2.175 billion offshore debut comes as capital requirements and a push for overseas expansion, together with ample liquidity in the Asian bond market, are encouraging more Chinese lenders to explore opportunities.

"Capital needs and the desire to expand funding channels, will drive more Chinese banks to issue AT1s and other debt instruments in the offshore market, especially those already listed on the Hong Kong stock exchange," a banker at a Chinese investment bank said.

Only last week, four more Chinese lenders announced plans to issue AT1 securities in the offshore market to replenish their capital.

Harbin Bank, which last December announced plans to issue up to 8 billion yuan ($1.2 billion) of AT1s in the offshore market, has recently picked 12 banks to arrange the proposed offering, a banker who participated in the beauty contest said.

China Merchants Bank late on Friday said it plans to issue up to 35 billion yuan preference shares in onshore and offshore markets.

It plans to issue up to 7.5 billion yuan in the offshore market and up to 27.5 billion yuan in China's domestic market, according to a filing with the Hong Kong stock exchange.

Postal Savings Bank of China said on Friday it would raise up to 50 billion yuan in offshore AT1 notes.

Bank of Chongqing and Bank of Jinzhou also said last week that they planned to issue offshore AT1 bonds.

Meanwhile, Bank of Zhengzhou, a lender based in central Henan province, on Monday said it plans to raise up to 8 billion yuan from an offshore preference shares offering.

Rapid credit growth, together with tighter controls on off-balance-sheet wealth management activities and deteriorating asset quality, are putting pressure on Chinese banks to raise external capital, Fitch said in a report. The 15 commercial banks rated by Fitch have in total announced plans to issue 450 billion yuan in capital by end-2018 and may need to raise more than that amount, Fitch said.

The vast domestic market will account for much of that amount, but the offshore market is providing Chinese lenders with an attractive alternative as they look to support overseas operations.

"China is trying to stop capital flight. It is encouraging banks to use offshore funding to support cross-border M&As, rather than onshore funding. So Chinese banks will continue to raise funds in the offshore market," a banker from a European bank said.

SMALLER LENDERS

Bank of China was the first mainland lender to issue AT1 capital offshore with a $6.5 billion issue in October 2014, and this was followed by similar issues from other big banks as well as bad-debt manager China Cinda Asset Management.

Huishang Bank was the first of the smaller lenders to tap the offshore AT1 market, printing a $888 million 5.50 percent AT1 issue in November last year. China Minsheng Bank followed shortly afterwards with a $1.439 billion 4.95 percent AT1s in December last year.

The new entrant, Zheshang, based in eastern Zhejiang province, priced its Reg S perpetual non-call five AT1s at par to yield 5.45 percent, in from initial guidance of 5.7 percent area.

Final order statistics were not available at the time of writing, but the last update prior to pricing had demand of over $4 billion, including orders from joint lead managers.

Much of that demand was said to come from Chinese investors, in line with other Chinese banks' AT1 offerings. The securities are not rated, which made it difficult for foreign investors to assess the credit risk.

"The strong home bias of Chinese investors has provided support to Chinese banks' AT1s, and in general, to other Chinese credits, such as bonds issued by LGFVs (local government financing vehicles)," a trader at a European bank said.

On the other hand, the yield levels of Chinese bank AT1s "totally don't make sense" for foreign investors, who can find much better returns from investing in European bank AT1s, the trader said.

A trader from a Chinese brokerage also described Zheshang's pricing as tight, and put fair value at 5.6–5.7 percent, between the yield level of Minsheng's and Huishang's AT1s. These three Chinese banks' AT1s are all unrated and have similar structures.

Zheshang’s deal was the second AT1 issue in Asia this year, after Macquarie Bank sold $750 million of AT1 bonds on March 1.

CICC HK Securities, Citic CLSA Securities, CMB International, Ping An of China Securities (Hong Kong), Haitong International, BOC International and HSBC were joint global coordinators of Zheshang's deal.

The JGCs were also bookrunners with BNP Paribas, CMBC International, CCB International, Goldman Sachs (Asia), ABC International, Bank of Communications' Hong Kong branch, SPDB International, Yue Xiu Securities and China Silk Road International Capital. (Reporting by Carol Chan; editing by Daniel Stanton and Steve Garton)

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