China's government will pump $19 billion into Agricultural Bank of China and remove most of its $120 billion of bad loans, paving the way for the lender to restructure and sell shares to the public.
The cash injection will be announced today, a bank official with knowledge of the matter said, declining to be identified before the announcement at 3:30 p.m. A unit of China's sovereign wealth fund will take a 50 percent stake in the bank and China's finance ministry will hold the rest, the person said.
The bailout completes a decade-long, $500 billion-effort to reorganize China's banking industry after years of state-directed lending caused bad debts to balloon. Unlike competitors such as Industrial & Commercial Bank of China Ltd., which sold stock when economic growth was quickening, Agricultural Bank's overhaul comes as the global credit crunch saps demand for China's exports.
``This culminates years and hundreds of billions of dollars of backstopping of China's banking industry,'' said David Liao, who helps manage $975 million at HSBC Jintrust Fund Management Co. in Shanghai. ``From now on, Chinese banks are supposed to walk on their own and the current economic downturn gives them the opportunity to prove themselves in terms of risk management and internal controls.''
Agricultural Bank, founded in 1979 to serve the nation's 800 million farmers, plans to sell stakes to cornerstone investors before going public, following a template used by ICBC, China Construction Bank Corp. and Bank of China Ltd. The nation's three largest lenders received a combined $60 billion in capital injections before raising $43 billion selling shares in the past two years.
Delinquent Loans
China's economy grew 9 percent in the third quarter, the slowest pace in five years, underscoring concern that the spreading financial crisis threatens the biggest contributor to global growth.
The government will remove bad debt from Agricultural Bank's balance sheet to reduce the non-performing loan ratio to about 4 percent, the person said. Agricultural Bank, with 6 trillion yuan ($878 billion) of assets, had 818 billion yuan of delinquent loans, accounting for 23.5 percent of its total advances, according to its 2007 annual report.
Its bad-loan ratio is four times the average of its Chinese rivals, according to data from the industry's regulator and annual reports.
The government may have to spend $200 billion to bail out the company by removing delinquent loans and injecting capital, Standard & Poor's had estimated in October 2007. That would be almost double what China spent on recapitalizing ICBC, now the world's largest bank by market value, in 2005.
Helping Farmers
Premier Wen Jiabao has made boosting incomes for China's farmers a priority, promoting loans to them and raising public works spending to double their earnings by 2020. The average income of a rural resident was 4,140 yuan ($605) in 2007, less than a third of an urban counterpart, according to government statistics.
Agricultural Bank, which controls 13 percent of China's deposit and loan markets, return its focus to farmers and agricultural businesses after an earlier shift to urban customers for growth, the government has said. Chinese banks have closed 31,000 rural branches over the past decade because of mounting bad loans and operating losses.
China is reorganizing state-owned lenders and policy banks and pushing them to sell shares so that they're required to meet international accounting, disclosure and capital adequacy standards, which may help improve competitiveness.
China Construction Bank Corp. was the first of the nation's four largest to go public in October 2005, raising $9.2 billion from selling shares in Hong Kong. Bank of China followed with an $11.2 billion initial public offering in June 2006 and ICBC set a record with its $22 billion sale in October of that year.
Agricultural Bank was China's third-largest by assets and operated 24,000 outlets nationwide as of the end of 2007. ICBC, the nation's largest, owns about 16,400 branches nationwide.
