How is the pricing scheme for the four major banks' private placements determined? Direct coverage of the four major banks' 520 billion "private placement" meeting

After announcing the private placement plan on Sunday afternoon, on the afternoon of March 31, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank held investor meetings respectively.

At the meeting, the senior executives of the relevant banks provided detailed explanations regarding the basis for determining the private placement price, the impact on each bank, and future performance outlook.

With the investor meetings held, the private placements of the four major banks are about to enter the next stage.

Four Banks Inject a Total of 520 Billion

According to the announcement on March 30, the four major state-owned banks—Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank—are conducting a targeted private placement of shares to the Ministry of Finance and other institutions, raising a total of 520 billion yuan to strengthen their capital strength.

Specifically, the Ministry of Finance is injecting a total of 500 billion yuan, China Mobile Group and China Shipbuilding Group plan to increase their capital in Postal Savings Bank by 7.854 billion yuan and 4.566 billion yuan respectively, while China Tobacco and Shuangwei Investment plan to increase their capital in Bank of Communications by 4.58 billion yuan and 3.0 billion yuan respectively.

Comprehensive Premium Issuance

The issuance price for the capital increase of the four major banks is higher than the current stock price. Guolian Minsheng Securities calculated that, based on the private placement price, the four state-owned banks have a certain premium compared to the latest closing price (March 28), with Postal Savings Bank having the highest premium (21.54%) and China Construction Bank having the lowest premium (8.80%).

At the investor briefing, Postal Savings Bank Vice President Du Chunye pointed out that the issuance price was determined using a locked price private placement and premium issuance method. The final issuance price is 6.32 yuan per share (subsequent adjustments for ex-rights and ex-dividends may apply), which complies with the CSRC's regulation that the issuance price should not be lower than 80% of the average trading price of A-shares over the 20 trading days prior to the pricing benchmark date, and it achieves a premium issuance compared to the average trading price of A-shares over the previous 20 trading days.

“Currently, the A-share valuation level of state-owned banks is generally higher than that of H-shares. Issuing at a premium in the A-share market can maximize the protection of the interests of all bank shareholders (including A-share and H-share shareholders), inject strong confidence into the capital market, and help further restore the valuation of the banking industry. The valuation level of our A-shares is relatively higher than that of H-shares.” Du Chunye stated.

Regarding the premium private placement issue, China Construction Bank Chief Financial Officer Sheng Liurong stated that the issuance price was reasonably determined in consideration of the interests of existing shareholders and new capital shareholders, price-to-book ratio, capital replenishment scale, market conditions, and other factors. This capital increase has a relatively small dilution ratio on the earnings per share of existing shareholders, but the issuance price is at a higher premium compared to the current market price of A-shares, effectively protecting the interests of existing shareholders.

How are the Issuance Targets Determined?

During the communication, the senior executives of the four major banks expressed the following key points regarding the arrangement of the private placement targets: Firstly, the replenishment of core Tier 1 capital by state-owned banks is arranged by the state, with funding provided by the Ministry of Finance through the issuance of special government bonds. Therefore, the issuance targets are primarily the Ministry of Finance, and other issuance targets are determined after fully soliciting the opinions of state-owned shareholders under the coordination of the national working group.

Secondly, the participation of the Ministry of Finance and state-owned shareholders in this capital increase not only reflects the protection of the capital market and the interests of minority shareholders but also highlights the strong confidence in the future development of state-owned banks and the high recognition of their long-term investment value.

Thirdly, this capital injection is an important measure of the national package of incremental policies, aimed at helping state-owned banks "strengthen their muscles and bones," fully embodying the policy idea of "making preparations before it rains," and ultimately building a positive cycle of "capital replenishment - business innovation - value creation."

Why adopt the private placement route?

The Chief Financial Officer of China Construction Bank, Sheng Liurong, stated: Issuing shares to specific targets to raise funds is currently the best financing method for our bank.

"This private placement of A-shares to specific targets meets the needs of our business development and capital replenishment, and is the most suitable capital replenishment tool for our bank's current situation. This private placement is a policy benefit, with subscription funds sourced from the issuance of special government bonds, and the placement targets have been locked in advance, which will not have a 'blood-sucking' effect on the secondary market."

Future dividend policy direction

Regarding whether this private placement will affect the dividend policy, the Vice President of Postal Savings Bank, Du Chunye, stated: Postal Savings Bank attaches great importance to reasonable investment returns for investors, with cumulative dividends exceeding 160 billion yuan since its listing. Our bank will formulate a reasonable dividend policy to create long-term, sustainable investment returns for investors.

The Secretary of the Board of Directors of Bank of Communications, He Zhaobin, stated: The dividend payout ratio of Bank of Communications has remained above 30% for 13 consecutive years, and it will begin implementing interim dividends in 2024. Bank of Communications is confident in continuously rewarding shareholders with good performance and stable dividends.

The Secretary of the Board of Directors of Bank of China, Zhuo Chengwen, clearly stated: Our profit distribution policy has not changed. Since the reform and listing, cumulative dividends have exceeded 900 billion yuan, and the dividend ratio has remained stable at over 30% since 2015.

The Chief Financial Officer of China Construction Bank, Sheng Liurong, responded: Since its listing, China Construction Bank's cumulative cash dividends have reached 1.28 trillion yuan (excluding the 2024 year-end dividend), far exceeding the IPO financing and post-listing equity refinancing amounts.

Guangfa Securities commented: The capital increase has limited dilution on the dividend yield, and the high dividend value remains. After estimating the capital increase, the A-share dividend yield of the four state-owned banks in 2024 is still above 4%. If considering the improvement in net profit due to the increased scale after the capital increase, the dynamic dilution effect on the dividend yield is even smaller.

How to protect minority shareholders

Zhuo Chengwen, Secretary of the Board of Directors of Bank of China, pointed out: Our bank will take effective measures to strengthen capital management, further enhance profitability, and minimize the impact of this issuance on the immediate returns of ordinary shareholders, fully protecting the legitimate rights and interests of our ordinary shareholders, especially minority shareholders Proposed measures include: first, strengthening the management of raised funds to improve the efficiency of fund utilization; second, promoting strategic transformation and development to optimize global comprehensive service capabilities; third, enhancing refined capital management to improve capital utilization efficiency; fourth, building a robust comprehensive risk management system to reduce capital consumption; fifth, implementing a market value management mechanism and emphasizing investor returns.

Appendix: A Brief History of Capital Injection by the Big Four Banks

According to Huatai Securities, excluding the current round of capital injection, historically, the Big Four banks had two rounds of centralized capital injection from the central government before their listings.

The first round was in 1998 when the Ministry of Finance issued special government bonds worth 270 billion yuan to the Big Four banks with a maturity of 30 years, and the raised funds were injected into the banks as capital to enhance their risk resistance capabilities.

The second round occurred between 2003 and 2008 when Central Huijin Investment Ltd. used foreign exchange reserves to inject a total of 79 billion USD into the Big Four banks while optimizing asset quality by stripping off non-performing assets. Ultimately, the capital adequacy ratios of the Big Four banks gradually met standards, successfully completing their shareholding reforms and going public.

Since the listing of large state-owned banks, the six major banks have cumulatively implemented 10 refinancing rounds from 2010 to the present, mainly divided into two phases:

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