Fundraising pressure on China's banks unlikely to ease

Despite a flurry of deals last year that raised nearly $82 billion, stock and bond sales by China’s banks are expected to continue as the industry pumps out loans to support its economy.

While Industrial and Commercial Bank of China (1398.HK) (601398.SS) said on Thursday it will not pursue fund raising for another three years, other banks may have to tap markets to keep up with loan growth.

The Agricultural Bank of China (1288.HK)(601288.SS), having raised $22 billion in an IPO last August, has already tapped investors for another $8 billion of capital barely two weeks into 2011. And that still may not be enough, according to some analysts.

With Chinese banks embarking on another lending spree in recent months, some may not have as big a cushion as they think when it comes to cash reserves.

For now, though, the near term fund raising targets are expected to be small to mid-sized lenders such as China Merchants Bank (600036.SS), analysts say. China Merchant’s top-quality reserves — known as Core Tier 1 capital — are the lowest among the top eight.

“The smaller players are known for growing their loan book aggressively, so I expect share issues to be something that may happen again in the future,” said Sophia Huo, an analyst at Daiwa Securities in Hong Kong.

China Merchants Bank declined to comment for this article.

Chinese banks raised $81.6 billion to shore up their balance sheets in 2010, according to Thomson Reuters data, with AgBank’s IPO and clocking in as the world’s biggest IPO on record.

The tighter capital controls come at a time when regulators are trying to pull back on lending to drain liquidity out of the system and cool China’s red-hot growth, with tougher rules expected in the coming year.

However, despite all the rhetoric about restricted lending, the banks don’t seem to be listening, with overall loans climbing to 1.6 trillion yuan in the last quarter of 2010 as borrowers tapped the banks ahead of an expected rise in interest rates.

And the new year has brought no sign of a slowdown, with sources saying banks doled out 500 billion yuan ($75.6 billion) in new loans in the first week of January alone.

“The banks have their own relationships they need to maintain with their customers, so they probably have to continue lending if their customers want it,” said Daiwa’s Huo.

Among the stock deals anticipated for 2011, mid-sized lender China CITIC Bank (0998.HK), 15 percent owned by Spain’s BBVA (BBVA.MC), said it would look to raise more than $3 billion.

AgBank may need a fresh infusion of cash as early as 2012, when its self-imposed three-year limit on new fundraising expires.

Michael Werner, senior equity analyst at Bernstein Research said that even after AgBank’s fund raising efforts, its core capital ratio is 9.75 percent, or slightly below what China’s banks are aiming for.