SHANGHAI/HONG KONG (Reuters) -
Chinese banks, under government pressure to shore up their finances, are set to unleash a wave of billions of dollars in capital raising that could strain equity markets but also spur innovation in debt instruments.
The banks could go to the market with a slew of new stock and bond offers as they look to raise as much as 300 billion yuan ($44 billion) over the next few years, according to some estimates.
The move would follow a surge in bank lending in the first half of this year, encouraged by the central government under its broader 4 trillion yuan economic stimulus plan. But now the regulator, worried about a lending bubble, is cautioning banks to ensure their capital is adequate.
Three of the country's top four listed banks, Bank of China Ltd , China Construction Bank and Bank of Communications have already started work on fundraising proposals, a source told Reuters on Monday.
"There's no doubt there will be a massive wave of fund raising from Chinese banks, but the key question is when, where and how," said Fan Kunxiang, analyst at Haitong Securities Co. "If banks all rush to sell shares within a short period, it would unavoidably be a blow to the stock market."
The Chinese lenders aren't the only ones in Asia looking to raise capital. Japan's banks, for instance, could be raising tens of billions of dollars to meet stricter capital rules. Mitsubishi UFJ Financial Group , Japan's top bank, said last week it would raise $11 billion to meet coming regulations.
In the latest wake-up call to lenders, China's top banking regulator Liu Mingkang warned in an article published on Tuesday that banks need to protect themselves from credit risk caused by changes in the country's industrial structure.
Analysts said small- and medium-sized lenders could be the first to feel the pinch, lacking the resources of larger lenders.
In a potential sign of things to come, mid-sized Industrial Bank said on Monday it would raise up to $2.64 billion in a rights issue to plug a capital shortfall.
Earlier this year, rivals Shanghai Pudong Development Bank and China Minsheng Banking Corp announced plans to raise a total of about 53 billion yuan via share sales.
'ROOM FOR INNOVATION'
Chinese banks must keep their capital adequacy ratio -- a key measure of their ability to absorb losses -- above 8 percent by law. But regulators late last year urged small- and mid-sized listed lenders to aim for 10 percent or higher.
The China Banking Regulatory Commission has used various measures to tighten those rules this year and repeatedly warned against reckless lending.
Bank of China's capital adequacy ratio stood at 11.6 percent as of September 30, compared with 12.6 percent for ICBC , China's largest lender, and 12.1 percent for China Construction Bank. All were well above the 8 percent regulatory minimum.
Concerns about new capital raising have weighed on banking stocks since mid-year when the regulator first started signaling its caution.
Shanghai-listed shares of ICBC are up a scant 1.3 percent since mid-year, while Bank of China is up 2.3 percent and China Construction Bank is up 4.2 percent. All those are well behind a 13.2 percent rise for the broader market.
The need for more capital could continue to weigh, and even spread if the broader market cannot absorb the huge sums of new funds required.
"The market has largely priced in expectations of fund-raisings by banks," said Wu Yonggang, analyst at Guotai Junan Securities. "But if regulators suddenly raise ratio requirements ... all banks will be short of capital, and that would scare investors in the stock market."
The looming pressure is already forcing market players to look at other ways of raising capital.
Some of those, including use of debt markets, could provide an opportunity for China to introduce innovative financial instruments, such as bonds with deferrable interest payments, said Liao Qiang, an analyst at Standard & Poor's.
"Compared with overseas markets, China has very limited types of instruments in the debt market that banks can use to replenish capital," Liao said. "There's room for innovation."
Other analysts pointed out the new capital raising could come over a longer period, which would lighten the load on markets.
None of China's dual-listed banks need new equity now, but there may be such a need over the next two to three years, Citigroup said in a November 19 report. Bank of China also said on Tuesday it is studying various ways to raise capital but has no plans for now to do so.
"I think big banks such as Bank of China and China Construction Bank are not in a hurry to raise capital, but it's natural for them to start thinking about it," said Guotai's Wu.