ICBC mulls on issuing preference shares

Dividends of these shares are non-cumulative.

It has been reported that China-based ICBC plans to issue conditional convertible preference shares.

According to a research note from Maybank Kim Eng, the board of ICBC has proposed and approved the issue of 450m domestic and 350m offshore preference shares at CNY100 per share.

Both issues will be conducted through a private placement to not more than 200 subscribers each, and the report also noted that dividends of these shares are non-cumulative.

If ICBC’s CET1 CAR falls to 5.125% (or below), these preference shares will be converted into ordinary shares, the report said.

Here's more from Maybank Kim Eng:

The conversion price of onshore preference shares is CNY3.44 while it has not been fixed for offshore preferences shares.

Limited EPS and ROE dilution. We expect ICBC to issue 400m preference shares in 2H14 and the remaining 400m shares in mid-2015.

Based on the historical coupon rate of ICBC’s issued subordinated debt (3.28-5.56%) during 2005-12 and its 2013 ordinary share gross dividend yield (6.3% at current share price), we project a preference share dividend yield of 6% for ICBC.

Assuming the new capital is used to invest in 0% risk-weight assets (1-year government bonds with coupon rate of 3.69%), we estimate the EPS and ROE dilution will be 1.4% and 20bps for 2015.

Tier-1 CAR reached min. requirement. As a global systemically important bank, ICBC’s minimum Tier-1 CAR requirement is 11% by 2018.

We estimate it will be enhanced 50bps to 11.1% in Dec 2015 with the issuance of preference shares.

Hence, there should be no urgent need for further capital replenishment during 2H15-2016.