Adds 1.9% points to CAR — We have been of the view that CMB needs to raise new equity due to its relatively low Tier 1 ratio of 6.5% in 1Q09. This is despite a total CAR (11.0% 1Q09) that meets the CBRC's requirement. We think extra Tier 1 capital would be beneficial especially in the current strong loan growth environment. An issue size of US$3bn is in fact not a huge size for CMB in our view, as it would lift FY09E T1 CAR by 1.9% points to 8.7%, which would still be shy of the 9.5% to 10% range for the big state banks.
Proportional A/H share issue makes most sense — We believe a rights issue proportional to the split of A/H shares would be most equitable and beneficial. 82% of CMB's shares are A-shares, whereas 18% are H-shares. With the A-shares trading at a 25% premium, issuing more A-shares in-line with this share mix would reduce the number of new shares needed (less EPS dilution).
ROE and EPS dilution — A US$3bn equity issue would dilute ROE by 3% points – our FY10E ROE would fall from 18.5% to 15.5%. A proportional rights issue at say a 20% discount to current prices we estimate would lead to an increase in outstanding shares of 7-8%, and EPS dilution of 6-7%. The amount of dilution increases with the size of the discount/lower share price (see Figure 1 for sensitivities).
Still premium valuations — After factoring in book value accretion from a potential capital issue, CMB would be on 2.7x 09E P/B and 2.4x 10E P/B, or ~20% premium to the sector average. After factoring in EPS dilution, CMB would be on 16.3x FY10E PE, or ~50% premium to the sector average. Given rich valuations and near-term earnings growth issues (slower loan growth, rising operating costs due to continued branch expansion), we maintain our Sell rating on CMB and prefer CCB, ICBC and CNCB in the sector.
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