(Yicai) Sept. 7 -- China plans to inject a more-than-expected CNY360 billion (USD54 billion) into eight major state-owned banks and insurers, with the finance ministry contributing CNY300 billion, in what will be the biggest recapitalization of the country’s financial institutions in recent years.

The immediate objective is to replenish their core Tier-1 capital, strengthen their risk resilience, and boost their capacity to support the real economy.

The sale of special government bonds this year to fund capital replenishment at big Chinese state-owned banks and insurers had been anticipated, based on this year's Government Work Report and earlier signals from financial watchdogs. 

Industrial and Commercial Bank of China and Agricultural Bank of China will seek to raise as much as CNY100 billion and CNY160 billion, respectively, by issuing new Chinese mainland-listed shares to specific investors including the finance ministry and China National Tobacco, according to exchange filings yesterday. The ministry will buy CNY70 billion (USD10.4 billion) of ICBC shares and CNY130 billion of ABC’s.

Their plans were within market expectations, as the four other large state-owned lenders had completed similar capital injections last year.

China Life Insurance Group, People’s Insurance Company of China, and China Taiping Insurance Group announced yesterday that the ministry will pump in CNY35 billion, CNY15 billion, and CNY7 billion (USD1 billion), respectively. It will also inject CNY30 billion into ‌China Export-Import Bank of China and CNY10 billion into China Export & Credit Insurance.

In addition, China Re Group will issue to the ministry about 2.26 billion shares at CNY1.33 (20 US cents) apiece, higher than its Hong Kong-listed share price.

Boost to Lending Firepower

The ministry’s CNY300 billion contribution could enable about CNY4 trillion (USD596 billion) of additional asset growth, enhancing the banks' capacity for direct lending and external mergers and acquisitions and thereby providing strong support for the real economy while helping prevent financial risks, according to China International Capital Corporation, a financial services and investment manager.

The move will raise the core tier-one capital of ICBC and ABC by 0.6 percentage point on average, slightly lower than the 1 percentage point in the first batch, per CICC data. The CNY300 billion injection is equivalent to 0.7 years of banks' internally generated capital replenishment and 2.2 years of dividend payments.

ICBC and ABC said the issue price will not be lower than the average of their mainland-listed shares over the 20 trading days before pricing. But because their stocks have traded below net asset value for a long time, concerns have arisen about private placement pricing and the dilution of shareholder equity.

The two lenders said that after the placements are completed, their net asset bases will increase, which will to some extent dilute short-term return on equity. But in the long run, the benefits of raising funds to support the development of various businesses will gradually emerge, positively impacting their performance.

Meanwhile, both banks have disclosed specific measures to offset the immediate impact, including strengthening oversight of the funds raised and improving their profit-distribution systems.

Given the huge size of ICBC and ABC, the price-to-book ratio calculated based on their current stock price and net asset value after excluding 2025 dividends is around 0.8 times to 0.9 times, according to Wang Yifeng, chief financial analyst at Everbright Securities. The pricing of their share sales will be close to the net asset value and the dilution effect will be limited, he said.

Editor: Futura Costaglione