On March 6, 2012, Industrial Bank (IB) announced the resolution of its board of directors in which the Bank planned to issue non-open A-shares to four special objects: PICC Asset Management Company Limited, China National Tobacco Corporation, Beijing Infrastructure Investment Co., Ltd., and Shanghai Eightrent ZhengYang Rental Co., Ltd. to raise funds not more than RMB 26.380 billion by issuing not more than 2.073 billion shares at the price of RMB 12.73 per share.
Under the financial storm in the US and EU in recent years, the regulatory authorities in countries around the world have elevated the regulatory standards for banking capital. Against such a background, the mainstream banks of all countries around the world are planning to supplement capital in various forms so as to improve the capital sufficiency levels and increase risk resistance. In this regard, domestic banks are of no exception. Since 2011, there have been many listed banks in China announcing their re-funding plans in various forms including tailored additional shares, rationed shares, H-shares, and convertible bonds, etc.
At this time, IB announced its financing plan based on a non-open issuance at a fixed price. It is not hard to see that this plan can kill two birds with one stones. While giving full consideration to many factors such as its own development need, regulatory requirements for capital, and market influence, the bank introduced strategic investors at the right moment, supplementing the core capital in an effective way and tamping the capital base for business development. Moreover, by introducing strategic investors who can share its competitive resources with the bank and have advantages that are mutually complementary to those of the bank, it is helpful to further improve the shareholder structure, enhance the corporate governance level, and drive the leap-frog development of relevant businesses. This financing plan not only meets the need of the bank for its own development, but also facilitates the maintenance of market stability. This is another important landmark event in the development course of IB.
With Fast Development Showing its Great Investment Value, IB Introduced Strategic Investors to Transmit Positive Signals
For five years following the IPO, IB has made considerable progress in terms of both hard indices, such as business, finance, and asset quality, and soft indices, such as risk control and corporate governance. Since its IPO, IB has witnessed fast growth in various businesses and a constant increase in capital scale. By the end of September 2011, total assets ha d reached RMB 2.1 trillion, up over 140% compared with the scale in 2007 upon its IPO. While the bank has kept strong profitability and significant growth of profits continuously, its annual mean profit growth rate has been over 40%. As a result, the bank has earned favorable returns since its IPO, with the return on total assets above 1% and the weighted return on net assets over 24%. With prudent and effective risk management, IB has maintained continuous growth in asset scale and maintained stable asset quality. At the end of September 2011, the non-performing asset ratio was 0.34%, reaching the best level in the banking industry. The important indices of the company, including growth speed, profitability, level of return and asset quality, etc., all ranked towards the front in the banking industry. According to the ranking of Top 1000 Banks in 2011 released by the British Magazine, The Banker, IB ranked 75 in terms of total assets, up by 18 places over last year. Leading business level and performance is the most important guarantee for IB to attract investors.
It's worth noting that issuance to special objects at a fixed price requires the investors to sign an agreement before the board of directors of IB, and, there is also a warranty for the lock-up period of more than three years. All of these transmit strong positive signals to the market and reflect the high recognition of investors to the investment value of IB and the firm belief in the long-term development of the bank.
Through Active Capital Management, IB Took Various Measures to Supplemented Capital
IB established a capital management function at the layer of board of directors at an early time. Through receiving periodical reports on the situation of capital management, the board of directors gave active and dynamic directing of adjustment, drove the management team to take measures constantly, and strengthen capital management. For instance, it strengthened the management over the scale of risk assets to ensure that the index of capital sufficiency can meet the requirements of the regulatory authorities; strengthen ed the management of economic capital to enhance the awareness of saving capital and improve the asset-liability structure; strengthen ed the management of capital supplementation planning to enhance the prospectiveness and promptness; and intensif ied research into capital regulating policies and management of capital statistics to improve the fundamental works for capital management.
IB has always attached great importance to supplementing capital by combining many financing methods. Since 2006, the bank has issued hybrid capital debt and subordinated debt to improve supplementary capital and adjust the capital structure. In the aspect of core capital, even though IB has made rationed shares following the IPO, the bank has maintained strong profitability, with its retained earnings increasing year on year. Therefore, IB mainly depends on the retained earnings to improve its core capital.
As for this non-open issuance for supplementing capital, it is in fact an important step in the capital planning made by IB in an earlier period, exhibiting that the bank has long been prospective in capital management. The previous outstanding performance of IB in such return indices as ROE and ROA was based upon its strong capability in capital management and could not be achieved without its active awareness in capital management.
In announcing this resolution of its board of directors, IB also made public its medium-term capital planning, where it specifie d that its capital sufficiency will meet the regulatory requirement in a dynamic manner in the coming three years and it will strive to make the level of its capital sufficiency outperform that average level of similar banks and maintain the favorable market image of a bank with sufficient capital.
Consolidating Capital Foundation and Improving Development Potential
Capital sufficiency is a solid foundation for a bank to make sturdy development. With expanding asset and business scale, IB has maintained a fast growth rate in the scale of risk assets. By the end of September 2011, the risk assets of IB had reached RMB 1.27 trillion, increasing 26.45% over the beginning of 2011; the capital sufficiency had reached 10.92%, and the core capital sufficiency was 8.08%, down 0.30% and 0.72% respectively over the beginning of 2011. In order to make up the capital gap due to business expansion, IB has retained profits consecutively relying on its outstanding profitability, thus realizing internal accumulation. It supplemented the core capital by RMB 35.681 billion in total through profit accumulation from 2008 to 2010. At the same time, based on the general judgment over the development trend of the Chinese banking sector and considering its own situation, IB estimates that its businesses will keep growing stably at a fast rate in the coming years. If the capital cannot be supplemented in a timely manner, it will lead capital sufficiency to decrease continuously. This will restrict the development speed and space of IB, which is not favorable for protecting the interests of all shareholders.
Through this non-open issuance, IB will further improve its capital sufficiency and core capital sufficiency and reinforce its risk resistance, which will further boost the fast development of the bank's businesses, increase its profitability, and build a solid foundation for realizing its strategic objectives.
Allying with Strategic Investors to Increase Development Space in the Future
For years, IB has been good at improve its banking value through cooperation with strategic investors. In 2000, the bank accelerated its development toward a national commercial bank by introducing domestic strategic investors and financial investors. In 2004, IB significantly improved its corporate governance level and business development by introducing three overseas strategic investors including Hang Seng Bank and International Finance Corporation. In 2007, it became a public bank by introducing public shareholders upon its IPO, thus witnessing a new round of fast and sturdy development.
In virtue of this non-open issuance, IB introduced four investors with superior assets including PICC Asset Management Company Limited, China National Tobacco Corporation, and Beijing Infrastructure Investment Co., Ltd., killing two birds with one stone by combining capital supplementation and cooperation with strategic investors.
The parent company of PICC Asset Management, PICC, is a famous insurance finance group in China, with businesses covering a number of fields such as insurance, trusts, funds, and asset management, which are mutually complementary to the banking businesses. Under the leading of State Tobacco Monopoly Administration, China National Tobacco Corporation is a national economic entity integrating agriculture, industry, commerce and trading, boasting rich financial and business resources. Beijing Infrastructure Investment Co., Ltd. is a solely SOE subordinated to State-owned Assets Supervision and Administration Commission of Beijing Municipality, playing an important role in the construction and administration of urban transport across Beijing. All these investors and IB have broad space and great potential to integrate resources and intensify cooperation in all fields. The construction of a capital bridge is helpful to further strengthen the strategic cooperation between IB and shareholder organizations, fully sharing their advantageous resources, and extending businesses in a leap-frog manner. At the same time, the introduction of large strategic investors is also in favor of further improving the shareholder structure and corporate governance. In this way, the bank can build a solid foundation for the long-run development, thus giving better returns to all shareholders.
Financing Method Designed in a Scientific Way Aimed at Minimiz ing Market Impact
Non-open issuance is the preferred option under the current situation. On one hand, in this non-open issuance, the issuing targets and price were decided in advance. This was in favor of locking the price, scale an d investors and further ensuring the success of financing. On the other hand, the funds for issuing shares to special objects at the fixed price were mainly external funds, so basically, no blood-drawing effect would be produced against the secondary market. In addition, the subscribing objects all promised a lock-up period for three or more years, so its impact to the capital market would be the smallest among all equity financing methods. This financing plan showcases the decision-making concept of IB that gives great consideration to protecting investors.
In deciding the financing scale, the bank took into consideration various factors such as capital regulat ory situation, market status, future strategies for banking development, RWA growth, future retention of profits and improvement of capital structure, and finally, it decided to raise not more than RMB 26.380 billion funds by way of non-open issuance. This also create s favorable conditions for supplementing tier 2 capital in many ways in the future.
Making Reasonable Evaluation Based on the Market Quotation and Giving Consideration to the Interests of Both New and Old Shareholders
Following the pricing principles of China Securities Regulatory Commission (CSRC) and market practice for issuing non-open shares, in this issuance, IB determined the issuing price at the rate of 90% of the average price in the 20 trading days prior to the date of announcement of the resolution of board of directors, that is RMB 12.73 per share, about 1.20 times as great as the net asset value per share at the end of 2011 (not audited). In the perspective of banking evaluation, the present price fully reflects the evaluation level given by the market to all banking stocks, and meanwhile, it is roughly equivalent to PB of similar banks in the world. From the perspective of recent share price movement, the current share price is not low, and the closing price before trade suspension grew over 15% compared with that in the middle of December 2011. The issuing price set in reference to the average price in the previous 20 days has showcased the rise in this period.
As for the original shareholders, this subscription price increased the net asset value per share and made the P/B ratio drop after the issuance. As a result, the evaluation is more appealing. In line with the law that the banking evaluation heavily depends on the P/B ratio, the drop will be in favor of recovering the share evaluation to the normal level, thus further influencing the performance of the share price in a positive way. As for the strategic investors, the shares subscribed this time require a lock-up period of three years. In confrontation with various uncertainties in the future lock-up period, the 1.20×P/B ratio will also reserve certain safety margin for them. Hence, such an issuing price balances the interests of all concerned parties in a desired way and plays an important role in guaranteeing the success of issuance.