HONG KONG (BLOOMBERG, REUTERS) - Struggling Chinese regional lender Hengfeng Bank may just have received a 100 billion yuan (S$19.35 billion) rescue package.
The Shandong-based lender will sell 60 billion new shares to Central Huijin Investment, a unit of China's sovereign wealth fund, 36 billion shares to Shandong Financial Asset Management and four billion shares to United Overseas Bank (UOB) and other investors, it said in a statement.
UOB said on Wednesday (Dec 18) it will pay $360 million to subscribe for 1.86 billion shares in the deal, taking its holding in the lender to 3.3 billion shares.
In all, Hengfeng Bank will raise 100 billion yuan through the share sale via private placement as part of government efforts to support indebted smaller banks and contain financial risk.
The rescue is likely to be among the largest among the smaller lenders, which underpins the severity of the risks facing Hengfeng, said Wang Yifeng, a senior analyst with Everbright Securities Co. "Existing shareholders are required to take up the responsibility to absorb risks in such rescues."
China's banking regulator said in June that the Shandong government was speeding up the restructuring of Hengfeng, a mid-sized bank that has failed to disclose its financial statements since 2017 due to management and liquidity issues. Hengfeng Bank had 1.2 trillion yuan (S$232 billion) of assets at the end of 2016, according to its most recent annual report.
"The lender has likely exhausted its capital and needs to expand its shareholder base," said Liam Zhou, founder of Shanghai-based money manager Minority Asset Management (MAM). "It's a move to defuse and prevent contagion risks."
The move underscores policy makers' efforts to restore confidence in its struggling banking system and its smaller lenders, a key source of credit to small and medium-sized companies. China shocked markets in May with a government takeover of Baoshang Bank - the first bank seizure in more than 20 years. Two months later, regulators took a different approach by having three state-owned financial heavyweights buy stakes in Bank of Jinzhou.
After the completion of the share sale, Central Huijin and Shandong Financial Asset Management will become controlling shareholders of Hengfeng, according to UOB's statement.
Before the share purchase announcement, UOB, which had been Hengfeng's second-largest shareholder, told Reuters in June that it retained a 13 per cent ownership in the Shandong lender.
In its Wednesday filing on the Singapore Exchange, UOB said the move is in line with its "focus on driving regional connectivity and building ecosystem partnerships to facilitate business and investment opportunities opening up across the region.
It added that the collaboration with Hengfeng Bank will help businesses benefit from Shandong's economic progress and financial liberalisation, and is in tandem with the partnership between Singapore and Shandong to promote business flows into South-east Asia with Singapore as a regional hub.
Regulators still need to approve the transaction. Hengfeng could not be reached for a comment.