China ‘bake-off' lures bankers for largest IPO

飞雪寒冰

When they began examining the books of Agricultural Bank of China in 2005 for a planned initial public offering, auditors privately predicted it would take a long time before the bank would be in suitable shape to sell shares to the public.

Five years and a $19bn government bail-out later and ABC has finally invited 21 international and Chinese banks to submit underwriting proposals for a simultaneous Shanghai and Hong Kong IPO that could raise as much as Rmb200bn ($29.3bn).

That would make it the world's largest IPO, a prize that has persuaded the top executives of many of the world's biggest investment banks to fly to Beijing to compete in what Chinese bankers refer to as a “bake-off”.

The ABC IPO is not the only thing that has the banking chiefs donning their aprons and oven gloves.

飞雪寒冰

Also on offer are the mandates to sell additional shares in most of ABC's competitors, as the world's largest banks by market capitalisation line up to raise fresh capital following an unprecedented lending spree last year.

Chinese banks extended Rmb9,590bn in new loans in 2009, more than double the amount lent a year earlier, as the government encouraged easy credit to boost growth in the face of the economic crisis.

Industrial and Commercial Bank of China, Bank of Communications, Bank of China and China Merchants Bank have all announced plans to raise fresh capital. All have been encouraged by a banking regulator that has been lifting capital requirements and trying to slow the flow of new bank loans because of fears of asset bubbles and the potential for inflation.

China Construction Bank, the country's second largest bank by assets, has yet to announce its capital-raising plans but media reports suggest it is planning to raise up to Rmb75bn through a rights issue in Hong Kong and convertible bond sale in Shanghai.

飞雪寒冰

Guo Shuqing, CCB chairman, told the Financial Times that his bank still met all capital requirements and had ample time to decide how best to raise fresh capital.

But analysts say regulators are keen for banks to raise money now, while market conditions are favourable and before bad loans from last year's lending spree begin to appear on the books.

“The regulator is very worried about potential asset impairment related to lending to provincial governments and so is pushing the banks to raise capital now to build up a buffer against future problems,” says Dorris Chen, an analyst with BNP Paribas. “They also have to raise money soon to allow some time before the ABC IPO so they don't flood the market with supply.”

In private, some Chinese bankers acknowledge that many infrastructure projects they have lent money to in the past year will struggle to create cash flow and will end up as bad loans on their books. ABC Bank has traditionally had the worst asset quality and the highest bad loan ratio of all the banks; a reason it has lagged so far behind its competitors, most of which carried out IPOs in 2005 and 2006. Another reason for its slow reform is a political requirement to provide financial services to rural areas and the agricultural sector, which forces the bank to balance this responsibility with the pursuit of profits.

飞雪寒冰

But bankers in Beijing and Hong Kong said ABC is now an attractive IPO prospect, having in recent years tidied up its balance sheet and ushered in new management.

ABC also stands to benefit from Beijing's “new socialist countryside” policies, which are focused on boosting economic development in rural areas and narrowing the income gap between rural and urban workers.

With 24,000 branches, mainly in rural areas, and more than 30,000 automatic tellers across the country, ABC is well positioned to capture a large slice of the forecast increased demand for financial services across the countryside. “Food production is a growing strategic priority for the Chinese government and ABC could be a big beneficiary of Beijing's policies to stimulate the rural economy,” says one Hong Kong-based banker.