What happened
China Everbright Bank (CEB) on 2 May 2017 proposed a 6.6 billion new issueof H shares (12.3% enlargement of number of shares) and to raise up toHK$35bn through a private placement. Most notably, the issuance price wasset at HK$5.3 a piece, a 48% premium to last close, as the issuance has to bedone above the historic book. The subscribers are 1) Overseas Chinese TownEnterprises Company (OCT), a central SOE engaged in tourism and propertydevelopment, which subscribed 8% of enlarged number of shares; and 2)China Everbright Group (CEG), the largest shareholder of the bank, whichsubscribed 4%. There is a 60- month lock-up period.
DB views
This private placement should strengthen CEB’s capital and hence relievesome pressure when facing tighter regulations. We estimate its core tier-1 ratiowould be up by 111bps to 9.36%, based on 1Q17 RWA.
However, the placement does not fully solve the problem if the bank doesnot change its business behavior. In past years CEB has been expandingits on-B/S shadow banking book (26% CAGR since 2015), which is mainlyin the form of receivable investments. The fast asset expansion waspredominantly supported by wholesale funding, i.e. borrowing frominterbank/NBFIs and issuance of bonds/CDs, which made up 34% of totalliabilities as of 1Q17. In our view CEB remains vulnerable amid thefinancial deleveraging with higher market rates and tighter regulations onshadow banking. It may particularly suffer from higher funding cost, NIMcompression, and additional provisions on shadow banking.
Moreover, this placement may lead to notable dilutions to existingshareholders. We estimate that the bank’s EPS would be diluted by 10% in2017E upon the completion of issuance, with ROE lowering by 0.5ppt to12.2% for 2017E.
Elsewhere there may be execution risk to complete the placement. Anexample: CEB actually proposed a 4 billion new H shares issue to CEG on28 Sept 2015 but ultimately ceased this proposal due to expiry ofshareholder approval.