(Yicai Global) March 3 -- After a seven-year lull and despite the potential short-term impact on their stock prices, small and mid-sized Chinese banks are turning to share allotments to raise funds needed to replenish capital and meet regulations. These share sales may suggest that the lenders lack access to other channels of financing.

Share allotments, in which listed companies sell new stock to existing shareholders at a discount, are a realistic choice for smaller banks to supplement their core tier one capital given their low market values, Liao Zhiming, chief banking analyst of China Merchants Securities, told Yicai Global.

Bank of Qingdao said on Feb. 26 that it will allot new equity to its investors at a ratio of up to three shares for every 10 and raise up to CNY5 billion (USD773.4 million) to replenish its core tier one capital. Bank of Jiangsu and Bank of Ningbo executed their respective CNY20 billion and CNY12 billion allotments in the second half of last year.

Supplementing capital this way is quicker, can preserve shareholder ratios, and is more feasible than convertible bonds and private placements, according to Li Yamin, general manager of BOC International’s securities research department.

But the approach is not generally the preferred option for China’s listed banks because it is likely to hurt their stock prices.

“This is because the allotment price is much lower than the market price, and shareholders may face direct losses if they don’t participate in the allotment,” Liao said. “Shareholders who don’t buy tend to sell their stock before the allotment to avoid a loss, which can hurt a bank’s short-term equity performance.”

Before the share allotments by Bank of Jiangsu and Bank of Ningbo, the last by a Chinese bank was in 2013. Lenders are turning to allotments again because of changes in the financing environment as well as greater pressure and limited channels for smaller lenders to replenish capital, an analyst with a Beijing securities trader told Yicai Global.

Still, the negative impact on share prices this time around may be smaller than it was seven years ago, given the historically low market valuations in the banking sector, said Xiao Feifei, chief banking analyst at Citic Securities.

More lenders, especially small and mid-sized banks, may choose to embrace allotments to meet their increasing need for supplementary capital, according to industry insiders.

Editors: Tang Shihua, Peter Thomas