Tang Bin: Good afternoon everyone! Thank you for attending teleconference for offering preferred shares of IB at Friday afternoon. I am Tang Bin, director and board secretary, Li Jian, general manager of Financial Planning Department and Huang Wanru, general manager of IB Board Office also join us in communication.
This morning, our Board passed several resolutions, including Proposal on the Plan for Non-public Offering of Domestic Preferred Shares, Proposal on Non-public Offering of Preferred Shares to Fujian Provincial Department of Finance, Proposal on Revision of the Company’s Articles of Incorporation and Proposal on the Medium-term Planning of Returns to Shareholders (2014-2016). Our Board has approved to offer domestic preferred shares of not more than 30 billion yuan to up to 200 qualified investors. According to the rules of disclosures, we can only send meeting notice after the closure of market. Sorry for the short notice. I'd like to thank you again for your support. Next, I will explain the major considerations and highlights in our offering program:
1. The Major Considerations
First, as a recovery and option of shareholders rights to corporate governance, preferred shares can provide specific investors with diversified investment channels. Preferred share is one kind of equity rights with two major “preferred” rights: 1) receive fixed dividends prior to ordinary shares holders 2) receive remaining property prior to ordinary shares holders when company goes to bankruptcy or liquidation. Back to 1988, when established as a joint-stock commercial bank, IB offered ordinary shares and preferred shares. In 1996, IB redeemed outstanding preferred shares according to Company Law and related regulations of People’s Bank of China. Today, according to the guidance of the State Council and resolutions of our Board, we proposed to offer preferred shares, define rights and obligations of preferred shares holders in offering program, and submit to approve by the forthcoming shareholders’ meeting. The practice is actually a recovery and option for shareholders’ rights.
Second, for banks, preferred shares will be helpful to fully employ existing financial tools, reduce financing cost and improving financing efficiency. According to Basel Accord III, commercial banks’ capital can be divided as core tier one capital, other tier one capital and tier two capital. Qualified preferred shares can be deemed as other tier one capital tool. At the end of 2013, the State Council released guidance on pilot program of preferred shares. Since the beginning of this year, CBRC, CSRC, Ministry of Finance and other departments released supporting policies successively, enabling preferred shares to be implemented successfully. In the past, the tier one capital of commercial banks consisted mostly by ordinary shares as core tier one capital due to limited capital tool. This time, we use preferred shares to supplement other tier one capital, which is useful to improve financing efficiency and reduce financing cost.
Fujian Department of Finance, the biggest shareholder of IB, has signed agreement with us to subscribe 2.5 billion yuan and undertake not to participate in the enquiry of dividend yield ratio and accept the conclusive dividend yield ratio. The director representative of Fujian Department of Finance withdrew from voting about the above matter in the Board meeting this morning.
Third, supporting the business development of banks. At present, indirect finance still dominating the financial market in China, and development of national economy requires support from banks. And with the implementation of Basel Accord III, regulatory bodies set stricter requirements on capital sufficiency rate and new standard on both numerator and denominator of the rate.
We believe that, beyond improving corporate system, supplementing bank’s capital and increasing financing efficiency, preferred shares also provide specific investors with a stable and high yield investment option.
2. Main Provisions of Offering Program
1) We plan to offer not more than 300 million shares with 100 yuan per share, and the total size will not exceed 30 billion yuan.
2) After the approval from CBRC and CSRC, non-public offering will be made to up to 200 qualified investors.
3) Dividend yield ratio and determining principle. Dividend yield ratio consists of benchmark rate and basic interest margin which will be determined by enquiry or other method recognized by regulatory bodies before offering. To provide better protection for investors, we also set up adjustment mechanism of dividend yield ratio, i.e. every 5 years as an interest accrual period and the rate will be the same for one period. The benchmark interest rate refers to the mean rate of return on treasury bonds with a repayment period of five years in the first 20 trading days prior to the deadline for subscription payment of this offering or the date of adjustment of benchmark interest rate.
4) Compulsory converting and dividends will not be accumulated. These are two requirements for preferred shares being other tier one capital tool. There are two way of guarantee in the program regarding non-accumulation of dividends: 1)If dividends of preferred shares of any given accounting year is cancelled in whole or partly, then the dividends of ordinary shares of this accounting must not be distributed; 2) preferred shares holders may recover their voting power and control if dividends of preferred shares are not paid as agreed for three accounting years accumulatively or two accounting years successively.
3. Highlights of the Offering Program
In designing the program, the interests of two types of shareholders have been fully considered.
In protecting the rights and interests of ordinary shares holders: 1) the provisions such as compulsory converting price and conditioned redemption have been designed taking account of rights and interests of ordinary shares holders, 2) besides this offering program, IB has no other ordinary shares financing plan in the next 12 months and 3) undertaking that, under the trend of interest rate liberalization, the yearly dividends proportion of ordinary shares in the next three years (2014-2016) will be at least 20% and higher where possible.
In protecting the rights and interests of preferred shares holders: 1) as agreed in the program, dividends will be paid for every accounting year. Before fully payment of agreed dividends to preferred shares holders, it will not distribute dividends to ordinary shares holders; 2) If dividends of preferred shares of any given accounting year are cancelled in whole or part, then the dividends of ordinary shares of such accounting must not be distributed. It must be declared that, although provisions such as compulsory converting and non-accumulation of dividends have been incorporated in the offering program according to the regulations of CBRC, banks normally will not behave in a way that would damage its business reputation for several reasons: 1) banking industry is strictly regulated and CBRC’s regulation standard is higher than international ones; 2) there is a great room between the current core tier one capital regulatory level and 5.125% as set by trigger event, and multiple regulatory lines have been defined and specific regulatory requirement such as restricting new business or adjusting existing business or each lines have been made by CBRC and 3) banks operate in credit business. In conclusion, we believe it is very unlikely for large and medium size Chinese banks to compulsorily convert preferred shares into ordinary shares and pay no dividend, and preferred shares holders may enjoy a high safety margin.
That is our analysis on the impact to ordinary shares holders and preferred share holders by offering preferred shares. As a matter of fact, capital market and our corporate governance will benefit most from offering preferred shares. Along with the recovery of preferred shares, rights of shareholders will be more balanced and various resources will be better integrated, thus promoting sustained development of banks and capital market.
And this is my introduction of the major considerations and highlights in our program, then we will answer your questions in the next. Thanks!
Guotai Junan Securities: I have two questions. First, what impact preferred shares will have on your operation, especially on capital sufficiency rate and profitability? Second, what will be the accounting method for such investment after investors purchase preferred shares?
Li Jian: We have always committed to improve our value and capital returns in a sustainable way, especially in the transformation process of commercial banks. After the adoption of Basel Accord III, the capital sufficiency rate of commercial banks is under pressure. This year, our jobs include offering preferred shares as well as supplement of tier two capital which will support our subsequent business development. Judged from situations up to date, the general operation is stable. As from now, there are still plenty of opportunities. We will be more prudent under the macro context, and capital supplement will provide support for the performance of this whole year. Thanks!
As for the second question, the first answer is: the purchasing of preferred shares by investors will be accounted as equity investment tool. In March 2013, Ministry of Finance has released Regulations on Separation and Accounting Treatment for Financial Liability and Equity Tools, further defined the relevant accounting treatment of financial tools such as preferred shares and perpetual debts, and specified that investors should be in line with issuers on the classification of equity or debt property for financial tools. Particularly, the preferred shares offered this time will be treated as equity and investors generally should classify it as equity investment. Second, according to the relevant existing rules, it is likely for investors to list preferred shares as “salable financial assets”. Regulations on Separation and Accounting Treatment for Financial Liability and Equity Tools specified that, investors holding financial tools such as preferred shares or perpetual debts should disclose the accounting classification, book values and other information of such financial tools in the notes to financial statements, such as “salable financial assets”. Third, preferred shares are still in pilot phase and no preferred shares have been completely offered. As the transfer system of preferred shares offered non-publicly is currently under construction, investors may decide proper accounting method according to general accounting principles in the future.
UBS Securities: The announcement of preferred shares program is good news to the market. My question is: What are the main considerations of offering 30 billion yuan this time? Will IB offer the shares in one time or several time?
Tang Bin: For the first question, we determined the size of preferred shares of commercial banks based on two points: 1) CSRC regulated that, the outstanding preferred shares of listed companies shall not exceed 50% of its total ordinary shares and the money raised shall not exceed 50% of net assets value before offering, 2) CBRC regulated from the view of capital composition that, the size of other tier one capital of tier one capital could be 1% of weighted risk assets. Taking account of development demands of our bank, we’ve prudently determined that the proposed size will be 1% of weighted risk assets at the end of 2015, i.e. 30 billion yuan.
For the second question, the preferred shares will be offered at one time. Thanks!
Credit SuisseFounderSecurities: My first question is about the draft schedule.Second question, Mr. Li just mentioned that there are plenty of opportunities in the market. I just wonder in which area IB sees good opportunity?
Tang Bin: As for the schedule, we have completed first phrase preparations, formulation of the program and approval of the Board, and shareholders meeting will be hold at June 27 to review the program. In the meantime, we will arrange further communication with investors regarding preferred shares program in Beijing, Shanghai, Shenzhen and Hong Kong, answer their questions and build consensus. We still need the approval of CBRC and rectification of CSRC in the next. Thanks!
Li Jian: From the structure of assets allocation of our bank, there are three businesses i.e. loan, institutional investment and structured financing, that require capital support. There are still plenty room in market-oriented allocation. Thanks!
CITIC Securities: Thank you for the detailed introduction given by the management of IB. First I want to confirm a specific point. You've mentioned that dividends to preferred shares will be guaranteed by system and promised to dividends of no less than 20% to ordinary shares, are these going to be incorporated into the program as a provision? Second, what about the liquidity of preferred shares after non-public offering?
Tang Bin: The first question actually is how can we balance the rights and interests of the two types of shareholders after the preferred shares were offered. For ordinary shares, our company promised cash dividends of no less than 20% in the next 3 years as part of the Proposal on the Medium-term Planning of Returns to Shareholders (2014-2016), which was approved by the Board. The protection to the rights of preferred shares holders are the key considerations in the amendment to article of associations this time. The protection mainly refers to the rights and obligations of shares holders and the sequence of dividends distribution. The payment of dividends to preferred shares holders is a precondition of the payment of dividends to ordinary shares holders.
The second question is about liquidity. There are two points here. First, the potential investors of preferred shares favor long term investment and stable returns. Their primary goal is to hold and gain dividends but short term trade. Second, there is no restricted trade period for the preferred shares this time. After offered, such shares could be transferred at trading platform specified by Shanghai Stock Exchange according to relevant rules. Thanks!
Tang Bin: Thank you for join us in communication about the preferred shares of our bank. I believe the preferred shares issued this time will be helpful to balance the rights and interests of shares holders, integrate resources and promote the healthy development of capital market and banks. Thank you again!