TheDeal.com - China bails out another bank

TheDeal.com - China bails out another bank







China bails out another bank
by Shu-Ching Jean Chen in Hong Kong Posted 02:26 EST, 22, Apr 2005


The Chinese government on Friday, April 22, took the long-awaited step of recapitalizing the country's largest bank by promising to inject 124 billion renminbi ($15 billion) into the Industrial and Commercial Bank of China.

The capital prop-up was expected as part of a restructuring designed to put the bank's scandal-ridden past behind it and to attract foreign investors to an initial public offering tentatively scheduled before the end 2009. But analysts expected it to be bigger, given the extent of ICBC's bad debts and the $22.5 billion cash injections handed to each of its smaller rivals, Bank of China and China Construction Bank, in 2003.

"The amount is not sufficient," said May Yen, a banking analyst at Moody's Investors Service. "They need at least more than double that to reach the performance targets comparable with Bank of China and China Construction Bank.''

China has been trying to whittle away the massive bad debts of its four largest banks to make them financially self-sufficient by listing them on stock markets. The task is huge, however, as the banks for decades have propped up money-losing state businesses and are saddled with nonperforming loans. Last year, China's national auditor chastised ICBC for irregularities, including false documentation for loans and lending losses.

China's business dailies splashed the ICBC announcement in bold headlines Friday, quoting state news outlet Xinhua News Agency. It said the central government would give its foreign exchange unit, Central Huijin Investment Co. Ltd., a 50% stake in ICBC to expand its equity base to Rmb248 billion. The Ministry of Finance would hold the remaining 50%.

That the injection is smaller than what No. 2 Bank of China and No. 3 China Construction Bank received partly reflects the complexity of problems at ICBC. The government has also attached tougher rules on the bailouts as it learns from previous experiences.

The government will "enact more stringent outside monitoring and auditing measures to ensure that the security and reason returns in the use of the national capital," Xinhua said.

All the top three banks are preparing for IPOs, which would be regarded as a stamp of confidence from international investors on China's success in overhauling the banking sector. Bank of China and Construction Bank hope to stage IPOs this year, despite a rash of scandals.

The future of the nation's fourth-largest lender, Bank of Agriculture, is less certain as the depth of its bad debts, which have never been published, is believed to be more severe.

Given ICBC's scale and its nonperforming loan ratio of 19.6% as of June 2004, analysts doubt the recapitalization can return it to health. With an asset base of about Rmb6 trillion, ICBC accounts for one-fifth of the nation's banking sector. The accounting firm Ernst & Young has been hired to audit ICBC assets.

Fitch Ratings estimated as much as $40 billion would be needed to lower ICBC's nonperforming loans down to below 5%, the level post-recapitalized Bank of China and China Construction Bank have achieved.

The recapitalization would raise ICBC's core capital adequacy ratio to 6%, up from more than 4%, Xinhua said. When complemented with a secondary debt issuing, ICBC's capital adequacy ration would rise above the official minimal of 8%