UPDATE 1-Bank of China sets big convertible bond issue

Published: 24 Jan 2010 17:20:08 PST

* Bank unveils bold plan to bolster capital

* To issue 40 bln yuan in 6-year convertibles

* Plan needs approval at March shareholders' meeting

BEIJING, Jan 22 - Bank of China plans to issue as much as 40 billion yuan ($5.86 billion) of six-year convertible bonds to shore up its capital base and maintain its lending capacity.

The proposal is subject to approval at a meeting of shareholders on March 19, the bank said in a statement on its website (www.boc.cn).

Bankers and analysts have identified Bank of China, the country's fourth-largest lender by assets, as one of the banks most in need of an infusion of funds to meet the capital adequacy ratio needed to support a torrid pace of lending.

"Excluding issuance costs, the proceeds from the issuance of the convertible bonds will be used to replenish the bank's capital base and working capital and to lift its capital adequacy ratio," the Beijing-based lender said.

At the end of September, Bank of China's CAR stood at 11.63 percent. The ratio for core capital was 9.37 percent.

Bank of China may need as much as 68.5 billion yuan of fresh capital to keep its Tier-1 ratio at 9 percent by the end of 2012, according to a report from Royal Bank of Scotland earlier this month.

"The reason that the bank is choosing to issue convertible bonds in the A-share market is that bonds count as Tier-2 capital prior to conversion into equity and will become core capital upon conversion," it said.

Bank of China said the bonds, which are convertible into the state-owned lender's domestically listed A-shares, will have a maximum coupon of 3 percent.

Lending at Chinese banks totalled 9.6 trillion yuan last year, about twice as much as in 2008, supporting the government's massive economic stimulus package but prompting concern that banks would need to raise fresh capital to preserve their CARs.

Bank of China was in talks with investment banks to raise as much as $15 billion in new funds to meet tougher capital guidelines set by Beijing, sources familiar with the matter said in November.

Chinese banks went on a renewed lending binge at the start of 2010, lending 1.1 trillion yuan in the first half of January alone, banking sources said this week, citing central bank data. ($1=6.827 Yuan)