Bank stocks head upward on preferred share reports

Banking shares are poised for a sustained rally, analysts said, as reports on Thursday said regulators will soon let qualified companies issue preferred stocks for the first time.

The China Securities Journal reported that rules will come out soon governing preferred stocks, a special class of shares that have the properties of both an equity and a debt instrument. The first issuance will happen in the second half of the year. Candidates include banks and energy companies that have a high debt ratio, according to the report.

Banking shares, the price of which has been on a low over the past two years, jumped on the news on Thursday. Industrial and Commercial Bank of China Ltd, the biggest stock in China by market capitalization, grew 1.24 percent to 3.27 yuan a share. Shanghai Pudong Development Bank, a city commercial bank based in Shanghai, jumped by 3.27 percent to 8.84 yuan a share. Only three of the 45 shares in the financial sector closed lower on Thursday.

The Shanghai Composite Index gained 1.07 percent, or 21.42 points, to 2,019 points, moving back above the psychologically important level of 2,000 points. The index has lost 3.78 percent this month on disappointing macroeconomic data.

The CSI 300 Index of the biggest shares in both Shanghai and Shenzhen rose 1.2 percent to 2,140.33 points.

The China Securities Regulatory Commission first started discussions about preferred stocks at the start of the year. It's widely interpreted that it's to help big State-owned companies, especially lenders, to raise capital, although an official with the commission said this week that there are no industry and market capitalization restrictions for preferred stock issuers.

"Preferred stocks are favorable for lenders because it allows them to raise funds at a lower cost and without further diluting their valuation," said Zhang Qi, a Shanghai-based analyst with Haitong Securities Co Ltd.

Preferred shares pay fixed dividends and are repaid before common stocks if bankruptcy strikes. They normally do not trade on the open market, carry no voting rights and do not dilute net profits attributable to shareholders.

Chinese lender's valuations have sunk over the past year to historic lows as investors speculate that further interest rate liberalization will fan competition and squeeze profit margins. Central bank Governor Zhou Xiaochuan said on Tuesday that the ceiling for deposit rates will be removed in one to two years. Chinese banks average price-earnings ratio, a gauge of valuation, was 4.5 in February, compared with the A-share market average of 9.4 and 10.4 in the Hong Kong market.

Guojin Securities said a report on Thursday that Chinese lenders' financing cost for preferred shares will be around 8 percent, substantially lower than the 20 percent for common stocks.