BOCOM announces deepened mixed-ownership, corporate governance reform plans

Shareholding incentive could be one reform area.

Foreign media recently reported that BOCOM has submitted a proposal for mixed-ownership reform and is waiting for regulators’ approval, and as a consequence, BOCOM’s H/A share price rallied by 6.2%/9.9% respectively on Monday, significantly outperforming HSI and SHCOMP’s increase of 0.9%/2.4%.

According to a research note from Barclays, after market close, BOCOM released an announcement, explaining that the bank is proactively studying on feasible plans to deepen mixed-ownership reform and improve corporate governance system, which is in line with decisions made at the Third Plenary Session of the 18th CPC Central Committee last November.

Barclays noted that though BOCOM gave no details of the reform under their study, it expects that the bank's management and employee stock ownership incentive (e.g. stock option incentive), among other things, could be one area of reform going forward.

Here's more from Barclays:

In May 2014, a number of senior managements of BOCOM purchased a total of 563,100 A-shares, which could be the prelude of ownership reform in BOCOM.

We expect that senior management and employees, with increasing shareholding allowed, could have more incentive to perform in the future, in our view.

The bank also said that its current shareholding structure represents the basic characteristics of a mixed-ownership economy by having state-owned, private and foreign capital (MOF/HSBC/Social Security Fund/Others: 26%/19%/14%/41% as of end-2013), which makes BOCOM a good candidate for initiating such reform, in our view.

In mid-July, the SASAC announced pilot reform program for six SOEs; mixed-ownership reform, among other things, is one of the key reform areas. The introduction of other forms of capital is widely believed to be able to improve corporate governance structure and strengthen supervision of executives, and therefore improve efficiency of the overall economy.

We expect recent news flows on SOE reform, including this one by BOCOM, to be positive for stock market sentiment.

Furthermore, we expect the potential positive impacts of such reform to be bigger on small and mid-size SOE banks than the large peers.