City commercial banks look for new capital

City commercial banks, regional lenders that are mostly under private ownership, are turning to the financial markets ever more this year as they try to accelerate their expansions.

So far this year, the institutions have made plans to raise more than 50 billion yuan ($7.99 billion) in the year, using either bond issuances or sales of equity.

Most recently, Hankou Bank Co Ltd in Wuhan, Hubei province, announced plans to sell 950 million shares to raise between 3.61 billion and 3.8 billion yuan. The offer price, which will come out to between 3.8 yuan and 4 yuan a share, is 60 to 70 percent higher than the lender's book value per share at the end of 2011. The premium is widely considered as too high, especially in light of bank shares' recent poor performance on the secondary market.

Hankou Bank has been expanding quickly in recent years. From 2009 to 2011, its annual profits increased by 60.6 percent on average and reached 963 million yuan in the first half of 2012. It had 197.9 billion yuan in total assets by the end of June, 43 percent more than at the end of 2011.

The lender is only one of many city commercial banks that have seen their profits and assets balloon.

By the end of 2011, the 144 city commercial banks in China had about 10 trillion yuan in total assets, 6.8 times more than at the end of 2003. By the end of the first half of 2012, they had 11.51 trillion yuan in total assets, constituting 9.1 percent of the banking industry's total assets.

"With such a growth rate, it's only natural that lenders need more money," said Jin Lin, a banking industry analyst with Orient Securities Co Ltd in Shanghai.

Most of the banks' fundraising is being done through private placements. Regulators have been reluctant to let city commercial banks go public, fearing that their explosive expansions will endanger financial stability.

So far, only three city commercial banks - Bank of Beijing Co Ltd, Bank of Nanjing Co Ltd and Bank of Ningbo Co Ltd - have gone public. Various city commercial banks that had planned to hold IPOs this year have since postponed them. According to media reports, 14 IPOs proposed by the banks are awaiting regulatory approvals.

A lack of ways to raise money could stall city commercial banks' expansions at a time when regulators are about to start working under a new framework. That framework, which will take effect in 2012, will mandate that lenders maintain deeper capital reserves. Non-systematically important banks will also be required to have a core capital adequacy ratio of at least 10.5 percent. Many city commercial banks now do not meet the requirement.

Guilin Bank Co Ltd, Guangdong Nanyue Bank Co Ltd, Bank of Tianjin Co Ltd and Fujian Haixia Bank Co Ltd are all planning equity private placements.