Banks are clearly thinking as much these days about selling off stakes in themselves or other capital raising plans as they are about banking – possibly more, if you’re a Barclays, Bank of America or an RBS.
But beyond Europe and the US, expect to see a concerted flurry of activity in Asia, including a deluge of bank paper from Japan, where some of the biggest banks are preparing to issue about $20bn worth of preferred share issues.
In China, western investors – mainly those with big acquisitions in the pipeline - are considering whether to monetise their paper gains in mainland lenders. Fortuitously, for those investors who got in early, when some of China’s biggest banks were coming to market around 2005, the lock-up periods on these shareholdings have just expired or are about to. Not so fortuitously, investors such as RBS and Bank of America are under huge pressure to raise capital at home.
At the same time, China’s banks after a dream run are finally succumbing to the economic downturn. Loan growth is slowing and losses from investment portfolios are mounting, as Lex recently noted, while asset quality is deteriorating.
China’s recent interest rates have hit government bond yields and hence the banks’ treasury returns. As pertinently, Chinese savers are shifting more money into higher-yielding term deposits, again increasing funding costs.
In what may set the trend, Bank of America, currently in the process of acquiring Merrill Lynch, is likely to be first off with the sale of some of its newly expanded stake in China Construction Bank.
BofA on Monday announced the biggest ever inbound investment in China, in which it will pay more than $7bn to increase its existing stake in CCB after exercising a call option to raise its stake in the Chinese lender to 19.13 per cent from 10.75 per cent.
Analysts estimate BofA paid around HK$2.80 per share to increase its holding, a 32 per cent discount from CCB’s Hong Kong-traded share price at the close of trade last Friday.
CCB’s shares dropped by as much as 9 per cent in Hong Kong on Tuesday as investors took news of the purchase as a sign BofA was planning to sell all or part of the original 9 per cent stake it bought in August 2005, just before CCB listed on the Hong Kong stock exchange. The shares later recovered to close at HK$3.88, down 5.6 per cent.
Even so, as BofA is estimated to have paid only HK$1.10 to HK$1.19 per share for its original stake in 2005, and stands to earn a handsome profit if it sells its shares into the public market or elsewhere.
If BofA were to sell the same number of CCB shares as it is now buying, that would yield a gain of more than $2.5bn, according to Lex’s calculations. Sure, BofA is committed to hold the new stake for another three years. But by then the outlook for banks, and China, may be a whole lot rosier.
Meanwhile, the rumblings from Hong Kong have grown louder that Royal Bank of Scotland is quietly shopping around its 5 per cent stake in Bank of China, the mainland’s second-largest lender. If true, this would mark a big change from RBS’s insistence in July that it not only remained committed to the relationship with BoC but would also expand its China operations.
At the time, the value of RBS’s 5 per cent stake in BoC had trebled to £2.4bn ($4.7bn) since it made the investment in 2005. This has come down somewhat but in these stretched times, wouldn’t be at all bad for a few years work. Earlier, during RBS’s £12bn rights issue in April, RBS executives stressed that a sale of the BoC stake would not be part of the bank’s capital-raising effort.
But things are – well, different for RBS now. And as Hank Paulson (and was it someone called Keynes?) said, when the facts change…
And back to Japan, where banks are also moving to raise capital – the latest being Sumitomo Mitsui Financial Group which, Bloomberg reports, plans to raise Y400bn ($4.1bn) through the sale of preferred securities. Mitsubishi UFJ Financial Group, Japan’s biggest bank, plans to sell more than Y900bn of shares while Mizuho Financial Group recently said it would sell as much as Y300bn in preferred securities.
In the case of SMFG and MUFG, both have committed to investing in western investment banks. SMFG invested £500m in Barclays in July while MUFG finalised an agreement last month to invest $9bn in Morgan Stanley. MUFG, which on Tuesday reported a 64 per cent annual fall in second-half net profit, has already completed the sale of Y390bn in preference shares. But instead of setting a target to raise an additional Y600bn in common shares on Tuesday, MUFG said it now planned to offer 1bn shares in the market. At Tuesday’s closing price, that would raise about Y550bn.
It would also add to a hell of a lot of Japanese bank paper already out there.
