Agricultural Bank to Raise $15.8 Billion in Private Placement

Agricultural Bank of China (ABC), the country’s third-largest bank, said on Monday it would raise as much as 100 billion yuan ($15.8 billion) in a private placement of its Shanghai-listed shares.

The bank will use the proceeds to replenish its core tier 1 capital and boost its capital adequacy, ABC said in a securities filing.

The adequacy ratio of ABC’s core tier 1 capital — meaning banks’ core capital and the main measure of a bank's financial strength — has been steadily improving over the last three years, but is still below the industry average level of 10.72%. After the private placement, the bank’s core tier 1 capital adequacy ratio will increase to 11.23% from 10.38%.

Banks calculate total capital by adding up their core capital and their supplementary capital. A bank’s capital is important because regulators require them to set aside a certain amount of cash to cushion them from losses in asset value. Under current banking regulations, banks’ capital adequacy ratio must be at least 8%, and their core capital adequacy ratio must be at least 6%.

ABC, the last of China’s big banks that went public, missed the last round of capital expansion by most state-owned banks in 2011, so this share placement does indicate the beginning of another round of banks’ refinancing, analysts with Shenwan Hongyuan Securities said.

Central Huijin Investment Ltd., the Ministry of Finance, China National Tobacco Corp., Shanghai Haiyan Investment Management Co., Zhongwei Capital, China National Tobacco Corp. Hubei Province Co. and NCI will be the subscribers to ABC’s private placement, the bank said. All the seven investors have fully subscribed their shares.

Central Huijin Investment and the Ministry of Finance are currently the largest shareholders of ABC. After the placement, Central Huijin will remain the bank’s controlling shareholder.

ABC is listed both in the Chinese mainland and Hong Kong. The bank said it chose to raise funds from the private placement of A shares instead of H shares because its H share prices have long lagged behind its A shares.

ABC’s A shares listed in Shanghai closed at 4.03 yuan Monday, while its H shares closed at HK$3.57 (2.88 yuan).

The fundraising comes as the banking regulator is tightening rules on banks’ investment in nonstandard assets as part of efforts to curb leverage and rein in shadow banking.

The regulatory developments will add to pressure on Chinese banks’ capital ratios. Analysts estimate that Chinese banks need to raise at least 500 billion yuan within the next three years to ensure their capital ratios comply with the requirements.

Last year, several state-owned banks including Bank of Communications, Bank of China, Industrial and Commercial Bank of China and ABC, raised more than 200 billion yuan through issuance of tier-2 capital bonds.

Caixin reported in late February that the financial regulators were studying measures to allow commercial banks to issue several new instruments for raising capital, including capital securities with no fixed maturity, and convertible bonds that allow holders to convert debt into equity for fixed terms.

Currently, Chinese banks’ ways of raising capital are limited to setting aside profits, offering private share placements and issuing tier-two capital bonds.