China’s AgriBank Said to Seek $11.4 Billion H.K. IPO

June 24 (Bloomberg) -- Agricultural Bank of China Ltd., the country’s largest lender by customers, will seek to raise as much as HK$88.4 billion ($11.4 billion) in the Hong Kong portion of its initial public offering, according to three people with knowledge of the price range.

Agricultural Bank will offer 25.4 billion shares in Hong Kong at HK$2.88 to HK$3.48 apiece, said the people, who declined to be identified because the details are private. The Beijing- based lender may also sell 22.2 billion shares in Shanghai at a price that hasn’t been disclosed. An e-mail sent to investors this month had indicated the company might offer $10 billion to $15 billion of shares in Hong Kong.

Chairman Xiang Junbo is wooing investors after the Shanghai Composite Index slid 22 percent this year and Fitch Ratings warned that record lending in 2009 may saddle the country’s banks with bad debts. Agricultural Bank is offering the shares at an average discount of 17 percent to its three biggest rivals on a price-to-book basis, according to estimates by the underwriters and data compiled by Bloomberg.

“Certainly it will be worth looking at,” said Julian Mayo, who helps oversee $3 billion as investment director at Charlemagne Capital in London. “It reflects an air of common sense in the pricing. It’s a sign that demand is less than had been the case if this deal came out six months ago.”

Biggest IPO Ever

Agricultural Bank’s Board Secretary Li Zhenjiang wasn’t immediately available for comment after business hours.

The lender, commonly known as ABC, needs to raise more than $22 billion to surpass Beijing-based Industrial & Commercial Bank of China Ltd.’s deal in 2006 as the world’s biggest IPO ever. The sale marks the final chapter of a decade-long overhaul of the country’s banking industry. The government spent an estimated $650 billion to clean out bad loans that were the legacy of years of state-directed lending gone awry.

Agricultural Bank priced the shares at 1.55 to 1.79 times 2010 book value as estimated by the IPO’s underwriters, the people familiar with the pricing said. That compares with 2.23 times for Beijing-based ICBC and 2.18 times for China Construction Bank Corp. Bank of China Ltd., the nation’s third- largest by assets and Agricultural Bank’s closest rival, trades at 1.59 times estimated book value.

‘Near Certainty’

Chinese banks’ surge in loan growth since late 2008 has raised their exposure to credit risk and future asset quality deterioration is “a near certainty,” Fitch Ratings said in a statement yesterday.

Agricultural Bank allocated $5.45 billion of the Hong Kong part of the IPO to corporate investors, according to people familiar with the matter. Qatar Investment Authority agreed to invest $2.8 billion and the Kuwait Investment Authority said it would buy $800 million. Corporate, or cornerstone, investors are guaranteed shares in IPOs in exchange for a pledge to hold the stock for a period of time.

The bank’s focus on serving the poorer parts of China has come at the cost of lower profitability and a higher bad-loan ratio than at local rivals, and it was the last lender to undergo a state-led restructuring, in 2008.

“They recruited several pretty high-profile cornerstone investors, and so far I think the interest has been on the strong side,” said Lei Wang, who helps oversee $18.7 billion at the Santa Fe, New Mexico-based Thornburg International Value Fund. “A reasonable discount versus peers makes sense. It has a low asset quality.”

Underwriters

China International Capital Corp., Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Macquarie Group Ltd. and Morgan Stanley were hired to arrange the Hong Kong portion of Agricultural Bank’s IPO together with its own investment unit. CICC, Citic Securities Co., China Galaxy Securities Co. and Guotai Junan Securities Co. are managing the bank’s yuan-denominated A-share offering.

The sale, scheduled to price July 6, is coming after state- backed deals pushed the amount raised in emerging market IPOs above developed nations for a record fifth straight quarter.

Agricultural Bank is forging ahead even after the European debt crisis spurred at least 47 companies worldwide to shelve initial sales since March. Petroleo Brasileiro SA, Brazil’s state-controlled oil company, this week delayed its plans to raise $25 billion to September from July.

“They’re competing for shelf space and it makes it more difficult,” said Uri Landesman, president of New York-based hedge fund, Platinum Partners, which oversees more than $500 million. Agricultural Bank’s pricing is “not a surprise given the difficulties in the market there lately.”

--Cathy Chan, Bei Hu, Jun Luo. With assistance from Inyoung Hwang, Lee Spears and Michael Tsang in New York and Zijing Wu in London. Editors: Joost Akkermans, Daniel Hauck.