The Industrial and Commercial Bank of China plans to issue 100 billion yuan (US$12 billion) in subordinated bonds later this year to replenish its capital base ahead of a planned initial public offering.

The bank is currently seeking regulatory approval for the bond issuance with new application materials it prepared after receiving a smaller-than-expected US$15 billion recapitalization from the government in April.

China's largest commercial bank has applied to be allowed to issue bonds a number of times over the past few years. The latest effort was made last year, but sources say the bank fell short of new requirements drawn up by the China Banking Regulatory Commission (CBRC), which include a 4 per cent of core capital.

"The bank could not meet all the new requirements until the financial restructuring," said a source familiar with the bond issue plan.

"So they are sending application materials again, but the overall amount should be little changed from the original plan," he added.

"That (the fund-raising target of the bond issuance) is close to our estimate," said Meizhi Yan, vice-president and senior analyst at Moody's Investors, which said earlier the ICBC would need a minimum of US$51 billion to meet CBRC requirements, including an 8 per cent capital adequacy ratio.

Yan noted although the US$15 billion capital infusion for the ICBC was smaller than expected, the bank is receiving government funding through other channels such as bad loan subsidies.

The ICBC sold 246 billion yuan (US$29.6 billion) of non-performing loans classified as "loss" to the State-owned China Huarong Asset Management Corporation in May, at prices reportedly much higher than could have finally been recovered.

Yan said her company's bank financial strength rating for ICBC stands unchanged at E+, which means the bank is marginally solvent. She added that it remains uncertain whether the bank will be able to keep its balance sheets healthy after the government bailout.

The source said the bank hopes to issue the bonds, probably in a few batches, by the end of this year, noting expectations that the central bank may further raise interest rates following last year's adjustment.

Li Zhiqiang, an analyst at CITIC Securities, said although liquidity in the bond market will be ample in the second half of the year, the issuance of subordinated bonds as large as those ICBC plans will likely put some downward pressure on Treasury bond yields.

The yields of subordinated bonds, which rank after other liabilities in terms of claims on issuer assets, are typically much higher than those on Treasury bonds due to their higher level of risk.

"If they finally move along with the plan, issuing 100 billion yuan of subordinated bonds in the second half of the year would be on the large side," Li said, noting that issuances of Treasury bonds and corporate bonds scheduled for the remainder of this year are estimated to be more than 450 billion yuan (US$54.2 billion) already.

The ICBC had 5.7 trillion yuan (US$690 billion) in total assets at the end of January.

(China Daily June 28, 2005)