Preferred shares may erode bank profits

The yields for the preferred shares will probably be set at 8 percent to 9 percent, which will make them "very attractive" to institutional investors such as insurance firms, according to Tang Yayun, a Shanghai-based analyst at Northeast Securities Co. That compares with the 5.8 percent coupon rate for 10-year bonds sold by ICBC this month.

The banks rely more on credit growth than their global rivals partly because Chinese rules, now in the process of being changed, guarantee a margin of about 3 percent between one-year deposit and lending rates. The government-controlled lenders were also the main channel for the unprecedented wave of economic stimulus that drove the nation's recovery from the global financial crisis.

"Chinese banks are addicted to loan growth, and that makes them more likely to tap equity markets again in the future," said Xue Huiru, a bank analyst in Shanghai for SWS Research Co, a unit of Shenyin & Wanguo Securities Co. "Asset-quality deterioration is the biggest overhang for China banks, and bad loans will keep rising at least for the rest of this year, so I don't expect their valuations to recover any time soon."

Last year, ICBC got about 75 percent of its revenue from net interest income, the difference between what it collects from lending and pays on deposits. That compared with 53 percent at HSBC and 45 percent for JPMorgan, according to data compiled by Bloomberg.

To change the model, Chinese lenders can bolster fee-based services－such as credit cards, investment banking, and trade settlement and clearing－and expand overseas, according to Tang, of Northeast Securities. ICBC aims to boost the proportion of its earnings that come from abroad to 10 percent in coming years from about 4 percent now.

"Banks are moving in the right direction by becoming more creative in offering fee-based services, but they need to speed up," Tang said.

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