Chinese bank IPO set to fall short

By Jamil Anderlini in Beijing

Published: June 6 2010 23:03 | Last updated: June 6 2010 23:03

Agricultural Bank of China’s initial public offering is likely to raise much less than the $30bn record-setting total it had hoped for when it sells shares in Hong Kong and Shanghai as early as next month.

Analysts and bankers close to the deal said that judging by investor appetite, the current state of the market and details in the IPO prospectus released on Friday, Agricultural Bank was more likely to raise a little over $20bn.
At that level the IPO would not be the world’s largest. It had been set to eclipse the IPO record set by Industrial and Commercial Bank of China, which raised $22bn in 2006.

China’s stock market has dropped about 20 per cent since mid-April on general worries about the country’s economy and concern over a huge flood of bank fundraisings hitting the market at the same time. Chinese lenders have been rushing to shore up their balance sheets following an unprecedented lending spree last year.

Bank of Communications, China’s fifth-largest bank which is almost one-fifth owned by HSBC of the UK, announced a Rmb33.07bn ($4.8bn) rights issue in Hong Kong and Shanghai on Sunday that was 21 per cent smaller than the amount it had earlier said it planned to raise.

HSBC said it would take up its full allotment of the Hong Kong portion of the rights issue, which is priced at a 37 per cent discount to the bank’s closing price on Friday.

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Agricultural Bank will sell up to 56.3bn new shares, or almost 17 per cent of its enlarged capital base, in Shanghai and Hong Kong, if over-allotment options are exercised in both markets.

The lender has in recent weeks on its roadshow offered potential investors an asking price roughly benchmarked to the 1.94 times price-to-book ratio ICBC sold its shares for in its IPO. But mainland Chinese fund managers have been reluctant to offer a ratio of more than 1.2 times and bankers said the eventual IPO price might be a ratio of about 1.3-1.5 times.

“The gap between the bank’s expectations and the market perception is huge and in the current market environment the bank will have to lower its sights somewhat,” said one person familiar with the IPO.

Agricultural Bank is the last of China’s large state-controlled banks to seek a public listing and is regarded as the weakest of the country’s lenders. Its net profits were Rmb65bn last year on Rmb8,880bn in total assets, while ICBC, the world’s largest lender by market value, made almost Rmb129bn on Rmb11,785bn in total assets.

Following a $19bn bail-out from China’s sovereign wealth fund at the end of 2008, Agricultural Bank’s non-performing loan ratio fell from almost 24 per cent at the end of 2007 to 2.9 per cent at the end of last year.

China’s securities regulator said it would review Agricultural Bank’s IPO plan on Wednesday. A Hong Kong hearing is expected the following day.

The IPO is almost certain to go ahead and will be supported by large state-owned Chinese enterprises such as PetroChina and China Life Insurance.

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