How will the state move forward with capital injections into the six major state-owned banks?
On September 24, Li Yunze, director of the State Administration of Financial Supervision and Administration, said at a press conference held by the Information Office of the State Council that after research, the state plans to increase the core Tier 1 capital of six large commercial banks, which will be implemented in an orderly manner in accordance with the idea of overall promotion and one bank and one policy in phases and batches.
Judging from the data, the core Tier 1 capital adequacy ratio of large state-owned banks has generally risen. According to the semi-annual reports of the six major banks, as of the end of June 2024, among the six major state-owned banks, CCB's core Tier 1 capital adequacy ratio ranked first, at 14.01%, and PSBC's core Tier 1 capital adequacy ratio ranked last, at 9.28%. The six major banks all stated in their semi-annual reports that their capital adequacy ratios met regulatory requirements, and the core Tier 1 capital adequacy ratios of the other five banks, except for the Postal Savings Bank, all increased from the end of the previous year.
As of the end of June 2024, the core Tier 1 capital adequacy ratio of the six major state-owned banks
In the context of the general increase in the core Tier 1 capital adequacy ratio of the six major state-owned banks and the satisfaction of regulatory requirements, why should the core Tier 1 capital of the six major banks be increased? And in what way will capital be increased?
Why the capital increase?
Pressure on spreads and earnings may be a reason for the increase. According to data disclosed by the State Administration of Financial Supervision and Administration, as of the end of the second quarter of 2024, the net interest margin of large commercial banks was 1.46%, down 0.01 percentage points from the end of the first quarter.
"In August 2024, the growth rate of loans of large banks will be about 10%, higher than the 8% of small and medium-sized banks, while the endogenous capital replenishment rate of large state-owned banks will only be about 7%, which is lower than the growth rate of assets, resulting in pressure on the core Tier 1 capital adequacy ratio." CICC research report believes that this round of capital increase is aimed at coping with the capital pressure in the context of the scissors difference in the speed of asset and endogenous capital replenishment, and the core Tier 1 capital can only be supplemented through external equity financing and endogenous profits, not through capital bonds, and in recent years, the interest margins and earnings of large state-owned banks have been under pressure, so it is necessary to seek external financing.
Oriental Jincheng Research Report believes that increasing the core Tier 1 capital of the six major banks can improve their capital adequacy ratio, enhance their ability to resist risks, help maintain stable operation in the current economic environment, and ensure the smooth operation of the financial system. At the same time, with the increase of banks' fee reduction and interest concessions and the intensification of market competition, banks' interest margins have narrowed and profit growth has slowed down, weakening their ability to replenish endogenous capital, and it is necessary to coordinate internal and external channels to replenish capital.
"Affected by the economic downturn and structural transformation, the net interest margin of large commercial banks has fallen to the lowest level in history, lower than the average level of commercial banks, the pressure on asset quality has risen, profitability has been significantly impacted, and the ability to replenish endogenous capital through profit retention has continued to decline." Dong Ximiao, chief researcher of Zhaolian, told The Paper that capital replenishment is an important means to enhance risk resistance, and serving the real economy requires not only capital, but also capital. Therefore, taking measures to increase the core Tier 1 capital of the six large commercial banks will enhance the development soundness of large commercial banks and their ability to serve the real economy, better play their important role in the financial system, and promote financial stability and high-quality development.
How to increase the capital?
According to CICC, historically, the state-owned banks have experienced three rounds of major capital injections, namely in 1998, the Ministry of Finance issued special treasury bonds to inject 270 billion yuan into the four major banks, from 2003 to 2007, the Ministry of Finance injected capital into ICBC, CCB, Bank of China and Bank of Communications through Huijin Company and realized the listing of A and H, and in 2010, ICBC, CCB, Bank of China and Bank of Communications supplemented capital through allotment, and since then, Agricultural Bank of China, Postal Savings Bank and Bank of Communications have successively raised funds through IPO and private placement.
Oriental Jincheng Research Report believes that the capital injection may be carried out through the capital injection of Central Huijin Company, private placement, the issuance of special treasury bonds by the Ministry of Finance, and the introduction of strategic investors. Among them, special treasury bonds have the advantages of high flexibility, large scale, low financing costs, and reduced fiscal pressure, and the Chinese government has also issued special treasury bonds to supplement the capital of commercial banks. At the same time, since 2020, more than 20 provinces and municipalities (districts) have supplemented the capital of small and medium-sized banks by issuing local government special bonds, so it is feasible to restart the issuance of special treasury bonds to replenish the blood of the six major banks. On the whole, the specific approach to be adopted will be based on the current regulatory policies and the actual development of each bank.
CICC's research report believes that private placement is a more feasible way. According to the analysis of the research report, due to the large scale of financing, with reference to historical experience, we expect that the main investors will be the central government, and the optional fundraising methods include the issuance of special treasury bonds or the financing of Central Huijin bonds; Historically, the fixed increase price is generally not less than 1 times the price-to-book ratio, and there are certain policy restrictions on the financing of "broken" listed companies.
Dong Ximiao said that it is expected that the core Tier 1 capital of large commercial banks may be increased through capital injection by Central Huijin Company, private placement, and issuance of special treasury bonds to supplement capital.
What is the rhythm of capital injection?
At the press conference, the State Administration of Financial Supervision proposed that the increase in core Tier 1 capital should be "coordinated and promoted, phased in batches, and one bank and one policy". So, what will be the pace of capital injection?
Oriental Jincheng Research Report believes that ICBC has a wide customer base and a large business scale, and CCB has traditional advantages in infrastructure construction loans, housing finance and other fields, which are closely related to the construction of major national projects. From the perspective of the urgency of capital replenishment, the core Tier 1 capital adequacy ratios of PSBC and Bank of Communications are 9.28% and 10.3% respectively, ranking low among the six major state-owned banks in China, and the demand for capital replenishment is relatively more urgent.
According to CICC's research report, the actual order and pace of progress are related to the bank's own capital needs, and the bank's high capital adequacy ratio has a dilutive effect on earnings per share and dividends. According to the requirements of Global Systemically Important Banks (GSIB), the core Tier 1 capital adequacy ratios of the Big Four, Bank of Communications, and Postal Savings Bank are 9.0%/8.5%/8.0% respectively, while the core Tier 1 capital adequacy ratios of ICBC/CCB among the six major banks are relatively sufficient to meet the regulatory requirements, and the Agricultural Bank of China, Bank of Communications, Bank of China and Postal Savings are close to the regulatory requirements.
(Source: The Paper)