OREANDA-NEWS. Shanghai Pudong Development Bank's (SPDB, BBB-/Stable) plan to raise CNY14.8bn (USD2.3bn) - via a share placement to Shanghai International Group (SIG), which is wholly owned by the Shanghai government, and one of its subsidiaries - reinforces the bank's strategic importance to the government, Fitch Ratings says. This linkage underscores the high probability that the Shanghai government would provide support to SPDB in times of need.

SPDB said on 10 March 2016 that it plans to privately place new shares with SIG and its fully owned subsidiary, Shanghai Guoxin Investment and Development Company. This proposed capital raising is in addition to SPDB's plan to issue CNY16.4bn (USD2.6bn) of shares to acquire Shanghai Trust from SIG and other shareholders. SIG's shareholding in SPDB is likely to increase to 29.8% upon completion of this private placement and SPDB's acquisition of Shanghai Trust, from 24.3%. The proposed private placement is pending regulatory and shareholder approval, and SIG will be obliged to hold the shares for at least 36 months.

However, Fitch estimates that the capital raising plan will have only a limited positive impact on SPDB's capital position (and thus its Viability Rating, VR), with the Common Equity Tier 1 (CET1) ratio likely to rise by less than 50pp (8.16% at end-June 2015) given the bank's growth. In addition, based on the bank's growth and capital plans for 2016-2018, significantly more capital will need to be raised. SPDB targets CET1 ratio, Tier 1 ratio and capital adequacy ratio (CAR) of 9.1%, 10.1% and 12.1%, respectively, by end-2018. This includes a 0.6% additional Pillar 2 capital requirement above the minimum requirements for domestic systemically important banks (D-SIBs), which are CET1 ratio of 8.5%, Tier 1 ratio of 9.5% and CAR of 11.5%.

SPDB estimates that these higher requirements imply it will need additional CET1 capital of CNY24bn-39bn, Tier 1 capital of CNY40bn-45bn and total capital of CNY45bn-61bn under different profit retention and growth scenarios. Actual capital needs will be contingent upon a number of factors, such as changes in regulations and the pace of margin compression and deterioration in asset quality, as well as asset growth. SIG has been supportive of SPDB's capital raising in the past and Fitch believes such ordinary capital support will continue given SPDB's strong relationship with the Shanghai government.

China has not announced the list of banks that qualify as D-SIBs and SPDB has not been designated as a D-SIB yet. Increasing systemic importance or more explicit statements of support by the government could further enhance the level of perceived sovereign support for banks.

Fitch reassessed the support for SPDB in November 2015 and upgraded SPDB's Support Rating to '2' from '3' and Issuer Default Rating (IDR) to 'BBB-' from 'BB+'. The upgrade reflected our view that the state has a higher propensity to support SPDB than we previously thought given the bank's increasing systemic and regional importance, as well as enhanced strategic role in the development of Shanghai as a major financial centre.

All Fitch-rated Chinese banks have IDRs that are driven by sovereign support, which would flow through local governments or larger state-owned enterprises.

According to SPDB's preliminary 2015 earnings, total assets grew by 20% year-over-year to CNY5trn. SPDB's track record of rapid asset growth has weakened its capital position and the bank has one of the weakest CET1 ratios among Fitch-rated Chinese banks at end-June 2015. That said, SPDB's VR at 'b+' reflects its modest overall loss-absorption buffer, which is in line with that of its mid-tier peers despite above-peer reserve levels.