Banks to issue preferred shares this year

The first batch of Chinese commercial banks may issue preferred shares this year, and investors will ask for a higher dividend rate while putting up with more uncertainties, experts said.

Preferred shares pay fixed dividends and enjoy priority over common stock in the event of bankruptcy. They typically do not trade on the open market, carry no voting rights and do not dilute net profits attributable to shareholders.

"The pace of Agricultural Bank of China and Bank of China is faster, and they probably will issue preferred shares this year," said an insider at one of the four major State-owned commercial banks.

Looming IPO restart weighs on Chinese stocks Bank of China, Agricultural Bank of China, China Construction Bank, and Industrial and Commercial Bank of China, along with Shanghai Pudong Development Bank, may be the first group of Chinese banks to issue preferred shares, said the insider, who declined to be named.

The source said the first batch of commercial banks has applied for financing totaling 370 billion yuan ($59.4 billion) but that the amount will have to be approved by regulators.

The China Securities Regulatory Commission and China Banking Regulatory Commission on Friday released a guideline on how commercial banks may issue preferred shares to replenish Tier 1 capital.

"The guideline set up application requirements and issuing procedures," said CSRC spokesman Deng Ge, "and also confirmed the qualified standards of preferred shares as a core capital instrument."

Commercial banks must first apply to the banking regulatory commission and then can apply to the securities regulatory commission, according to the guideline.

The guideline also said commercial banks can cancel their dividend payments, which will not be regarded as default events. Commercial banks cannot issue preferred shares with "put" provisions (where the holder can force issuers to redeem shares). They can transform preferred shares to common shares when a trigger event occurs.

"These rules bring uncertainties to investors, so they should ask for a higher dividend rate," said Ni Jun, an analyst at Shanghai-based Greenwoods Asset Management.

Ni told China Daily that the new rules will give the preferred shares of commercial banks the characteristics of stock, which may influence the purchases by their institutional investors as they have a limited amount to invest in equity products.

Ni added that preferred shares are still more like bond products and that the issuance by the first batch of commercial banks will not influence the Chinese bond market.

The insider told China Daily that preferred shares to be sold by commercial banks are popular among institutional investors, especially insurance companies, because the annual dividend rate is often as high as 7 percent, and the investment return can be sustainable.

The rules in the guideline are made to comply with Basel III guidelines for global banks' liquidity and risk buffers, said the insider.

"Commercial banks will offer higher dividend rates to attract investors and the annual dividends of preferred shares actually are not large for big banks," said the insider.

Chinese commercial banks have limited channels for replenishing capital, and they used to depend on retained earnings, and issuing common shares and a few subordinated bonds, according to CSRC.

The China Banking Regulatory Commission ruled that the Tier 1 capital adequacy ratio of Chinese commercial banks should be at least 6 percent, and the ratio should be at least 9.5 percent by the end of 2018. Last month, the securities commission released rules for a pilot program allowing companies to issue preferred shares.

Three types of listed companies may issue the shares: Shanghai Stock Exchange 50 index members (the largest by market capitalization)； companies planning to acquire other listed companies by issuing preferred shares for payment; and companies that are buying back common stock and that plan to decrease their registered capital by issuing preferred shares as payment.

Other domestically listed companies can conduct private placements of preferred shares through stock exchanges, as long as they comply with Chinese laws and regulations.

Unlisted domestic companies and Chinese firms listed abroad also can apply for private placements of preferred shares to qualified investors with the entity number in one issue limited to 200 or fewer.