BOC seeks 40b yuan to meet CAR rules
01/25/2010 Source: Global Times
The Bank of China (BOC) announced Friday it plans to float up to 40 billion yuan ($5.86 billion) in convertible bonds on the yuan-dominated A share market, in a bid to supplement its capital.
The issuance is to satisfy higher standards for the capital adequacy ratio (CAR) of commercial banks required by regulatory bodies from both home and abroad after the financial crisis, the BOC said in a statement on its website.
The CAR has been raised from 8 to 10 percent for small-and medium-sized banks and 11 percent for large banks, Wang Zhaoxing, vice chairman of the China Banking Regu-latory Commission (CBRC), wrote in an article published in December in China Finance, a semimonthly magazine run by the central bank. Wang’s article is widely considered an official announcement.
The weighted average CAR and core CAR of the country’s commercial banks reached 11.4 percent and 9 percent respectively by the end of the third quarter of 2009, conforming to the regulatory requirements, the CBRC said in December.
But commercial banks, including the BOC, generally reported declines in both the CAR and core CAR, as a result of last year’s unprecedented credit growth that saw net loans nearly double from 2008.
By the end of September last year, the CAR of the BOC dropped to 11.63 percent from 13.89 percent during the same period in 2008, and the core CAR also declined to 9.37 percent from 11.04 percent, according to data from the BOC’s quarterly reports.
The BOC is also one of seven Chinese banks that will run a trial implementation of the New Basel Capital Accord this year. The calculation of the CAR differs according to the accord, and the banks’ CAR will likely drop after applying the new calculation method.
Banks have to raise adequate capital for this year’s lending, said Lu Zhengwei, a senior economist at the Industrial Bank. Net loans issued this year are expected to reach 7.5 trillion yuan ($1.10 trillion), Liu Mingkang, chairman of the CBRC, forecast Wednesday. The figure, which lags the unprecedented credit growth last year, saw an annual growth of 16-18 percent.
Lu pointed out that Chinese banks now have no choice but to raise the CAR on orders of the regulatory body, as the main services offered by banks – deposits and loans – will naturally consume capital, while intermediary services that exhaust less capital are considered a cause of the crisis.
Converting profits into capital is also a solution, “but shareholders are not always willing to invest while not gaining rewards,” Lu said.
The face value of the bonds is planned to be 100 yuan ($14.65), with a coupon rate of up to 3 percent. The BOC is also likely to issue H-share bonds, the bank said. The convertible issuance plan will be reviewed at a general meeting of stockholders expected in March.
The BOC has issued 40 billion yuan worth of second bonds, part of an issuance plan of 120 billion yuan ($17.57 billion) approved in March 2009 and aimed at increasing capital.
