OREANDA-NEWS. April 05, 2012. Although Industrial Bank (IB) is not the earliest commercial bank to IPO in China, a range of active capital management actions carried out by the bank before and after IPO and the business development situation created by the favorable interaction between these actions and the capital market make people sit up and take notice, reported the press-centre of Industrial Bank.

Yes, IB has grasped strategic development opportunities one after another. Starting from a regional bank at a corner in Southeast China in the beginning, it has, in an admirable way, grown from a regional bank into a national bank and then into a large public listed bank. More importantly, IB has made outstanding achievements over these years.

Although the 2011 performance report of this listed bank is not currently announced, considering the date revealed in its financial statements and annual performance reports in the recent years, at least two important data reflecting whether a bank is performing well are impressive. First, ROE (that is the weighted return on net assets) is 24.68%, the industry average is only about just over 10%. Second, its asset quality remains stable and the non-performing loan ratio is below 0.4%. In fact, the above two ind ices of IB have always ranked front in the banking industry both at home and abroad over the past five years.

In the early spring, March is witness ing ceaseless wind and rain, good for grass to grow tall and the nightingales to fly in the air. Now, IB begins to take new actions!

In the evening of March 5, 2012, the Board of Directors of Industrial Bank Co., Ltd. released its announcement on the website of Shanghai Stock Exchange (SSE), stating that it would issue non-open A-shares to the four special investors including PICC Asset Management Company Limited, China National Tobacco Corporation, Beijing Infrastructure Investment Co., Ltd., and Shanghai Eightrent ZhengYang Rental Co., Ltd., and that IB planned to raise funds not more than RMB 26.38 billion by issuing nor more than 2.073 billion shares.

Why did IB launch this round of refinancing? Why did it choose these strategic investors? What benefits would this action bring to the bank's development? With such a series of questions in which investors are interested, the author interviewed Mr. Gao Jianping, Board Chairman of IB via email and telephone yesterday evening.

Grasping Opportunity to Bring New Vigor

Question: IB released its plan for non-open issuance on the website of SSE in yesterday evening. The market paid great attention to the announcement. Could you give us a general review of this non-open issuance of IB?

Gao Jianping: To introduce strategic investors through this non-open issuance, IB has at least taken into consideration three factors including our own development, regulatory requirements and the needs of economic development, and then we made the decision in a prudent way.

The success of this non-open issuance is not merely to supplement the core capital in an effective way and tamp the capital foundation for the development of our bank in the coming years. What's more important, is that the strategic investors introduced at this time may produce an advantageous complementary effect with us in the aspects of business and management resources, and this will play an important role to accelerate business development, improve shareholder structure and enhance corporate governance. I believe that this is another landmark event in the development course of IB.

Of course, as far as this capital supplementation is concerned, it is in fact a specific action in the capital planning made by IB in an earlier period, showcasing that our bank has always had long-term foresight regarding capital management. Our previous outstanding performance on return indices such as ROE and ROA was based on our high capital management capacity, reflecting a type of active capital management awareness. Generally speaking, this non-open issuance will further facilitate the sustained and healthy development of IB and help to increase our profitability and improve benefits to shareholders.

Question: Could you tell us what is the general background of this financing plan, or under what circumstances did you consider the financing plan?

Gao Jianping: As for this refinancing, IB definitely has taken into consideration the background in the following aspects.

On one hand, after the global financial crisis in 2008, the world established a new capital regulat ory framework with the Basel III Accord as the main content and elevated the capital regulat ory standard s in an all-round way. Against this background, the commercial banks in all countries around the globe are planning to supplement capital and improve capital sufficiency in various forms, and domestic banks are no exception. On the other hand, the regulatory authorities continued intensifying capital regulation for these years, and linked the key regulatory indices influencing the development of main businesses of banks with the capital sufficiency. Therefore, to some extent, the elevated capital sufficiency also increases the competitiveness and profitable room for banks to undertake further development.

As far as IB is concerned, we actively increased the scale to extend quality credit in line with the direction of the state policies and brought into play our role in supporting economic development in recent years, because of this our risk-weighted assets increased at a fast rate. Then, to timely supplement capital is also helpful to further extend ing our development room, achieve our sustainable development, and protect the fundamental interests of all shareholders. What's more important, is this time we introduce strategic investors with great strength and mutually complementary businesses through issuing tailored additional shares, so we can further expand the cooperation space of IB in the field of bank-insurance cooperation, industry-finance cooperation, etc. This will facilitate the bringing of new vigor for the development of the bank and push business transformation and the sustainable and st eady development of IB.

Question: Could you give a general introduction to the core content of this issuance plan?

Gao Jianping: This non-open issuance plan is clearly described in the resolution of our board of directors. In terms of key points, this refinancing is mainly carried out in the form of non-open issuance, targeting four enterprises including PICC Asset Management Company Limited, China National Tobacco Corporation, Beijing Infrastructure Investment Co., Ltd., and Shanghai Eightrent ZhengYang Rental Co., Ltd., aim ing to raise funds not more than RMB 26.380 billion by issuing not more than 2.073 billion shares. The funds raised will all be used to supplement the core capital of our bank after deducting relevant issuance cost.

Following the pricing principles of China Securities Regulatory Commission (CSRC) and market practice for issuing non-open shares, in this issuance, IB determined the issuing price at the rate of 90% of the average price over the 20 trading days prior to the date of announcement for the resolution of board of directors, that is RMB 12.73 per share. In case of any ex-right or ex-dividend during this period, the issuing price and number of shares will be adjusted accordingly.

Question: IB supplemented capital through rationed shares last time. Which factors does your company take into consideration in choose non-open issuance for this refinancing?

Gao Jianping: Different from the refinancing program accomplished through rationed shares in 2010, this time we choose the so-called tailored additional shares for refinancing.

There are two equity financing methods: open issuance and non-open issuance. The previous rationed shares belong to open issuance. The non-open issuance chosen for refinancing this time is responsible strategic behavior of our company as it gives consideration to many aspects such as our bank's development, benefits to shareholders, regulatory requirements and market influence.

Firstly, to consider from the aspect of boosting the development of our bank, we hope to take this refinancing opportunity to introduce strategic investors who hold long-term belief in the development of IB and that as far as possible will produce complementary effect with our bank in terms of business, rather than simple financial investors. In this regard, it is more proper to choose non-open issuance, which is helpful to locking outstanding shareholders.

Next, non-open issuance will have a small impact on the capital market. Compared with the open issuance, non-open issuance will not raise funds openly from the market. The issuing objects all aim to hold shares for a long period and the financing source is from external funds, so no blood-drawing effect will be produced against the secondary market which was not prosperous in recent years. It is also an issuing method that is encouraged by the regulatory authorities. We can say that we, in choosing this method, take into full consideration the capital market, especially the bearing capability of small- and medium-sized investors, so it is really a responsible action.

Finally, this non-open issuance will supplement the core capital and extend the space for supplementing the follow-up Tier 2 capital, thus better meeting the regulatory requirements.

Attracting capital with outstanding performance

Question: Just now you iterated the advantages that strategic investors bring to banks. Has the more than ten years' development of your bank proved this?

Gao Jianping: Yes, IB has always been stressing the actual value of strategic shareholders to our development. Since 2000, we have introduced strategic investors both from home and abroad many times. In 2000 before our IPO, for instance, we launched a campaign for strategic investment attraction. At that time, many central enterprises and well-known companies, such as China Electronics Corporation, Shenhua Guohua Energy Investment Co., Ltd., and Baosteel Group, participated in the program, and our capital stock increased from 2 billion shares to 3 billion shares. In 2004, we introduced Hang Seng Bank, Government of Singapore Investment Corporation, International Finance Corporation (IFC) and other oversea s investors, and our capital stock grew to nearly 4 billion shares. The two capital increases not only provided us with several billion in capital, consolidating the strength of our company, but also played an active role to push our corporate governance and business development. In this way, we have grown from “Fujian Industrial Bank” with businesses restricted to a corner of China into “Industrial Bank” toward s the whole country. After our IPO in 2007, IB became a public listed company, so our bank got a greater stage for development and achieved better business performance.

Question: Could you tell us how the investors for this non-open issuance were chosen, and what benefits they will bring to IB?

Gao Jianping: The process for selecting investors was not easy, and the fruits were hard-earned. At the beginning of this financing planning, since we did a good job in determining the objects, our objective was clear: we hope to combine capital supplementation with business cooperation with investors in an all-round way. Therefore, in selecting investors, we not only attach importance to financial strength, but more to the qualifications of an investor. We lay store by whether an investor has a collaborative effect with our bank, whether it recognizes the business culture and long-term investment value of IB, and whether it can help improve our shareholder structure and enhance our corporate governance.

Considering these factors, we finally decided to choose four investors including PICC, China National Tobacco, and Beijing Infrastructure Investment based on repeated contact and discussions with several months' effort.

For instance, the parent company of PICC Asset Management that is contribut ing about RMB 17.6 billion this time, PICC, is a famous insurance finance group in China, with businesses covering a number of fields such as insurance, trusts, funds, and asset management, which are mutually complementary to the banking businesses.

Also, China National Tobacco Corporation that is contribut ing RMB 5.2 billion is under the jurisdiction of the State Tobacco Monopoly Administration, which is a national economic entity integrating agriculture, industry, commerce and trading, boasting rich financial and business resources. The company will bring support for the business development of our bank.

And also, Beijing Infrastructure Investment Co., Ltd. that is contribut ing RMB 2 billion is a solely state-owned large enterprise subordinate to the State-owned Assets Supervision and Administration Commission of Beijing Municipality, playing an important role in the construction and administration of urban transport across Beijing. We also hope for more cooperation regarding relevant business.

To conclude, these investors all have the following characteristics: powerful overall strength, rich cooperation resources, and recognition of the long-term investment value of our bank. We believe that, like the strategic investors from both home and abroad that we introduced before, the investors introduced this time will, with the construction of a capital bridge, bring not merely capital, but even more so the overall elevation of both hard and soft strength. This is of great strategic significance for the long-term development of IB.

Question: All the four investors of this tailored issuance are subscrib ing a considerable amount, and in particular, PICC Asset Management and China National Tobacco will become important shareholders of your company. Could you tell us how they will participate in making major decisions in the future and what influence they will bring to the corporate governance of IB?

Gao Jianping: After becoming shareholders of our bank, these investors will share their rights and perform their obligations as shareholders in accordance with the relevant provisions of laws and regulations, such as Company Law, as well as the articles of association of the bank.

The incumbent directors, supervisors and senior executives of our bank will have their terms come to an end by September 2013. At that time, important shareholders will have the right to nominate director s and supervisor candidates to our the general shareholders meeting in accordance with the provisions of our articles of association and relevant regulations.

Question: IB has introduce d such outstanding strategic investors this time. In your opinion, which aspects of IB attract ed these investors?

Gao Jianping: IB has a good market reputation and investment value, and there are many highlights that appeal to these strategic investors, mainly including the following aspects:

First, excellent shareholder return index. Frankly speaking, as shareholders, external investors give top priority to the return level of a listed company. For nine years, IB has consecutively kept the yield of net assets at over 20%, and the annual mean profit growth rate at over 40%. Since our IPO, the yield of net assets has been kept above 24%, and in 2011, it reached 24.68%. These important indices rank front in the industry. In fact, the data shows the returns brought by our bank to our shareholders in the most direct way.

Second, broad development prospects. As a national joint-stock commercial bank that got an earl y start, IB has business licenses which are rare and nationwide business outlets. With broad banking business fields and radiating integrated operation, we have established significant competitive edges in many sub-fields. Based on previous data, the growth rate of IB in key business indices is in the leading echelon of the banking industry in China.

Third, we have outstanding risk management capa bilities and long, stable and excellent asset quality performance. With a very rigorous risk management culture, IB has kept the formation ratio of non-performing loan s stably at a low level and decreased the non-performing loan ratio year on year. According to the report announced at the end of the third quarter last year, the non-performing ratio is only 0.34%, obviously below that of other listed banks.

Fourth, we have sturdy, excellent, professional, and market-oriented operation and management teams. In our board of directors and board of supervisors, there are both senior experts from domestic and oversea s financial institutions and authoritative scholars from universities and research institutes. Our executive team is rooted in IB and each member has on average over 20 years of working experience in commercial banks. The team has a stable structure and clear echelons, with a sturdy but flexible operating style which is market-oriented.

Fifth, we have an advanced corporate governance concept and scientific and standardized governance mechanisms. The shareholders of IB may fully exercise their due rights.

Apart from these, IB also has many other merits attracting investors of different types. We believe that, with our capital strength and constant improvement in operating capability, we will display IB to the capital market continuously and win recognition.

Improving management and giving consideration to all parties

Question: The total financing amount is RMB 26.380 billion, a considerablesum. Could you introduce why IB cho se such an issuance scale?

Gao Jianping: There are scientific bases for the issuance scale of about RMB 26 billion. It is a prudent decision that we have made after taking into consideration many factors such as capital regulation tendency in China, future development strategies of IB, and market status.

Based on the medium and long-term capital planning of IB, the capital sufficiency of our bank will meet the regulatory requirements in a dynamic manner in the coming three years and we will strive to make our capital sufficiency outperform the average level of similar banks and maintain the favorable market image of a bank with sufficient capital.

In order to realize this objective, we determine to set this financing scale at over RMB 26 billion after taking into consideration such factors as our future retention of profits and improvement of capital structure. While supplementing the core capital in an effective way, this also creates favorable conditions for IB to supplement Tie 2 capital in many ways in the future.

Question: You have mentioned that the interests of small- and medium-sized investors had been taken into full consideration in this non-open issuance. Could tell us in which aspects IB has show ed its protection for the interests of small- and medium-sized shareholders?

Gao Jianping: From the perspective of our own development, just like what I have mentioned just now, this issuance may effectively supplement our capital, push forward the development of various businesses of our bank, and improve the sustained profitability of our enterprise in the future. Then, if our company makes greater progress, it will fundamentally bring benefits to all shareholders in the end, including small- and medium-sized shareholders of course.
 
From the perspective of banking evaluation, the issuing price is roughly equivalent to the P/B evaluation of similar banks both at home and abroad, reflecting the general evaluation level given by the capital market to the banking stocks in this period. This issuing price is higher than the net asset value per share, and after issuance, it will increase the net asset value per share of IB and make the P/B ratio drop after the issuance. As a result, the relative evaluation is more appealing. In line with the law that the banking evaluation heavily depends on P/B ratio, a low ratio may construct a good safety margin, which is in favor of restoring the share evaluation, and thus further influencing the performance of share price in a positive way.

From the perspective of market influence, the financing source is from external funds, rather than “drawing blood” from the capital market. Moreover, all investors promise a lock-up period for three or more years, thus minimizing the possible impact to the market. This is to protect the interests of small- and medium-sized shareholders and even the whole market.

Question: You have mentioned the lock-up periods of investors just now. Could you give an introduction to how the lock-up period of these strategic investors are arranged?

Gao Jianping: Since this issuance targets special investors at a fixed price, the lock-up period lasts for 36 months in line with the relevant provisions of China Securities Regulatory Commission (CSRC). In addition, according to the relevant requirements of China Banking Regulatory Commission (CBRC), major investors may need to promise a longer lock-up period. The promise for a long lock-up period further guarantees the stability of stock equity structure, and reflects that these investors highly recognize the investment value of our bank and hold a firm belief in our long-term development.

Question: Thank you Board Chairmen Gao for accepting our special interview in spite of your busy schedule. This shows the responsible attitude of the management team of IB regarding the matter informing investors about major events of the company fully. I believe that all investors will be happy in anticipating IB's smooth undertaking of this financing program and wish the company bright development prospect.

Gao Jianping: Yes. Suppose our listed company is a ship, then these big and small investors are the water to carry and the wind to push the ship. They are the great power to push us to go ahead and make progress continuously. Therefore, every major action of ours should first obtain the consent of our investors.

Of course, this non-open issuance should still wait for the delibration of our general meeting of shareholders and the examination and approval of the regulatory authorities such as CBRC and CSRC. There may be a while for us to wait. We will try to make this course as short as possible, but all of us should be patient. In a word, we will do our best by all means to improve our capital management level and drive forward the sustainable development of IB, so as to bring returns to all shareholders with improved business performance.