On November 30, Industrial Bank (IB) announced that its application for the issuance of tailored additional shares had been approved by China Securities Regulatory Commission. On that morning, Tang Bin, director and board secretary of IB accepted the exclusive interview of the reporter of Securities Times, sharing his opinion to the capital supplementation in the professional view based on the management of banking capital over years.
Funds-raising with the greatest complexity
Since 2000, IB has carried out a range of funds-raising campaigns including investment attraction, Initial Public Offerings (IPO), issuance of subordinated debts and hybrid capital debts, and issuance of rationed shares. Tang does not refrain from talking about the most exceptional and complicated circumstance confronting this issuance of tailored additional shares. Even if we calculate the time from this March when the proposal for issuing tailored additional shares was approved by the Board of Directors of IB, eight months have passed, and during the period the issuance was among heated dispute in the market.
“At the beginning of this year, some people expressed their doubt on whether we intended to dump our shares in pricing at the P/B ratio of 1.2.” Tang opened out: “PB pricing is under the influence of many factors including changes in economic environment and supply-demand relation, but investors need to assume the risks for a lock-up period over three years. Therefore, the price determined then was appropriate.”
From the beginning of this year till now, the shares of the bank have shown certain fluctuation, and sometimes, the price even dropped below the issuing price. Nonetheless, the fluctuation did not impair the investment decisions of investors. This shows that they were indeed making investment in value. Tang also said that to issue tailored additional shares had been based on the comparison with many program and it was a reasonable and prudent decision.
In recent years, the inner source based financing of IB accounted for more than 2/3 of its total. The subordinated debts and hybrid debts issued in the inter-bank market hit about RMB 27 billion, which had reached the upper limit for the given proportion. Therefore, before the issuance of tailored additional shares, the bank has carried out overall investigation over many available capital supplementing methods such as rationed shares, open additional shares, H-share, tailored additional shares, and convertible bonds.
Rationed shares and open additional shares are to be issued openly and both of them require raising funds from all existing shareholders. Against the market in a period of downturn, they would cause significant impacts to the secondary market. The issuance of H-share faces the impact of the financial crisis, so the refinancing function of H-share shrinks significantly. The convertible bonds require a long period for supplementing capital, and the uncertain transfer period will seriously influence the promptness in supplementing capital. Therefore, we finally chose the tailored additional shares.
“Rather than drawing blood from the market, tailored additional shares introduce incremental capital. Hence, they are a kind of supply.” Tang said this also showcased the new idea of regulatory authorities to the funds-raising of banking shares.
Additionally, because tailored additional shares could only be issued to ten investors and the large amount of shares should also be locked up for three years, the process to select the targets for raising funds also encountered great difficulties.
“This is actually a process of two-way selection. Not only IB took the initiative to choose investors, but also faced the selection of investors.” Tang introduced that there had not been many investors meeting the requirements, but only a very limited number of them would be qualified as IB planned to require that the enterprises should be mutually complementary with the bank in terms of business, recognize its value and be willing to make long-term investment.
“And also, PICC, PICC Property and Casualty and PICC Life Insurance have discussed with authorities for more than one month over whether the insurance capital could be used to invest in banking and how the capital can be invested in banking", said Tang.
As indicated by Tang, the on-going economic transformation in China would bring about many new matters that should be understood anew. In issuing tailored additional shares this time, IB did no more in seeking investors than exchanging views with these investors about economic development, the capital market, value of investment in banking shares, and even corporate governance, risk control and asset quality specifically.
Viewing capital supplementation beyond the framework
The core of Basel Accord III released on the basis of summarizing the experience in coping with the financial crisis is to further improve the capital quality and capital sufficiency of banks. For this reason, some investors believe that the adoption of Basel Accord III has intensified the refinancing demands of banks.
Tang holds that we should understand the influence of the adoption of Basel Accord III to the capital supplementation of the Chinese banking industry more comprehensively from more perspective.
The Measures on the Administration of Capital of Commercial Banks (Interim) promulgated this year is called the Chinese version of Basel Accord III. Based on following Basel Accord III, the Measures takes practices that are more suitable to the national situation of China. For instance, the lower rather than the higher limit of the capital sufficiency index given in Basel Accord III is chosen; the longer rather the shorter period for reaching the regulatory requirements is selected. With regard to the requirements for time and index, the Chinese version of Basel Accord III comes nearer to the actual situation of China.
Meanwhile, the regulatory authorities also encourage commercial banks to create capital tools to supplement other Tier 1 capital. In the international community, a commercial bank can also have 25% other Tier 1 capital apart from the core Tier 1 capital as provided in Basel Accord III. The core Tier 1 capital is represented by stock while other Tier 1 capital is represented by preferred shares and bonds. In the existing regulatory practice in China, now there is only core Tier 1 capital but not other Tier 1 capital. If other Tier 1 capital can be created in the Tier 1 capital in the future at the proportion of 25%, it scale can reach hundreds of billions, which will substantially alleviate the pressure on stock financing faced by commercial banks.
For the programs for the issuance of subordinated debts released by some banks recently, Tang indicated they would not cause impact to the market. On the one hand, subordinated debts and hybrid debts are issued in the inter-bank debt market, subscribed by financial institutions and circulated among banks. On the other hand, these programs are all plans now, and they will be launched gradually within an authorized year rather than completed in a concentrated manner within a short term. Therefore, in terms of either the targets or time of issuance, they will not have direct impact to the stock market. Moreover, according to the new regulatory measures, these debts will be restricted by the clauses of “decrease” and “conversion” in the next year, but all parties concerned need to reach consensus about the design of these clauses. Therefore, they cannot be released in a short term.
“Generally speaking, in terms of capital supply, China adopts Basel Accord III in a practical and prudent manner and encourages innovation. In the future, banks will depend less on the stock market in financing to some extent.” Tang further summarized, “in terms of capital demand, the current concept will pay more attention to the quality of development and the influence of development to the life of people, rather than simply depend on economic scale and speed. This will, to some extent, change the former situation where economic development drove banks to grant credits reversely and credits of banks compelled the demands of capital supplementation reversely. In this way, banks can make adjustment to their business structures and management capital more easily.
Shaping the concept of “Beautiful China”
In mentioning the hot concept of “Beautiful China” in the stock market, Tang believed that IB is doubtless an authentic concept share of “Beautiful China” as it has always been holding the philosophy of sustainable development and vigorously developing “green finance”, but the market did not have a sufficient understanding and pay enough attention to it.
In 2008, IB formally committed to adopt the Equator Principles, thus becoming the first local Equator bank in China. Since that time, IB has always been promoting the philosophy of “green finance” vigorously. After the first project compliant with the Equator Principles was launched in the beginning of this year, IB has provided a total of green financing loans nearly RMB 200 billion to around 1,000 enterprises. By the end of October, the balance of green finance loans extended by IB has exceeded RMB 110 billion, accounting for nearly 10% of the corporate credit balance.
“Don't look at the growth of both our institutional and non-institutional, and credit and non-credit assets simply. You should pay attention to the business transformation and capital restructuring carried out by IB to adapt to the market-oriented reform for years. This is consistent to the concept of ‘Beautiful China'”, indicated Tang. The new investors really understand the investment value of the company and we could say that they are eagerly looking forward to subscribing the shares. To realize “Beautiful China” means that, in the future, investment will further be made in the field of environmental protection.
The issuance of tailored additional shares, Tang said, has showcased the recognition of the “state-owned business sector” to the long-term investment value of blue chip shares represented by banking shares. Based on the consensus reached with the strategic investors in the areas of capital management and business development, together with the change in the macroeconomic environment, IB now is facing a brand-new development environment. Rather than increasing the amount of capital supplementation, the bank is confident in finding a road on which it can support the sustainable and steady business development with a small amount of capital supplementation and building the best concept share of “Beautiful China” in the A-share market.