What is $9bn between friends? Not more than a trifle, if you are Bank of Communications and your biggest, closest buddies have already agreed to a private placement capital raising equivalent to a fifth of your diluted share capital. A pity for those shareholders that the Chinese bank is now trading at a discount to the subscription price. Perhaps by thinking about what else the funds could have bought (half of Société Générale or UniCredit by market capitalisation for example), the bet does not appear so bad.
Equity raisings are all about timing (just ask UniCredit). This one is provident for BoCom, if not the value of its shareholders’ stakes. The new shares were offered at a near 10 per cent discount back in March. Now they are at a 7 per cent premium. And the outlook for China’s banks is weakening. BoCom and its four bigger rivals report first-half numbers this month. Liberalising interest rates will eat into previously rock-steady margins while the mistakes of the 2009 crisis-solving lending boom will show up in rising bad loans. The economy is also slowing. All this will hit banks at once, however. Barclays reckons the greater freedom in setting deposit rates will lower net interest margins by an average of just 9 basis points this year, although by a further 40bp in 2013.
Long-term, the more liberal environment for rates is positive if, as it should, it forces these state-controlled giants to compete more vigorously and to diversify their revenues. Loan interest accounts for about four-fifths of income at the big banks. But in the shorter-term, investors are jittery and it shows. The big banks are now trading, relative to book value, at an average 1.1 times, far below the 2.7 peak in late 2009. BoCom, at 0.9, is the lowest. It needed the capital for regulatory purposes and the added strength comes at a good time. The sector however is still not cheap relative to the risks ahead. China’s expansion, albeit at a slower rate, still offers huge opportunities for its biggest banks. But they must now prove they can take them.