Smaller China Banks to Test IPO Waters

A group of "city" banks listing mostly in domestic bourses could, despite vulnerability to downturns, help slake the mainland's investment thirst

Last year China was the scene of some of the biggest initial public offerings on the planet. Sprawling, state-owned lender Industrial & Commercial Bank of China raised $21.9 billion in a dual listing in Hong Kong and Shanghai, the biggest IPO in the world. Bank of China raised $13.6 billion when listed in the same two markets. In all, major Chinese banks have raised close to $50 billion since the beginning of 2006, according to Dealogic, a financial research group.

This year the deals will be decidedly smaller in scale, but a long line of Chinese urban, commercial banks are hoping to imitate the success of the country's bigger banks in raising capital and listing. So far the reception among investors in China and abroad to the 11 banks—bigger state-owned or joint-stock commercial banks—that have already gone through the IPO process has been largely positive, due to the country's high-speed economy and its high savings rate and rising incomes.

Whether China's smaller "city" banks, the so-called "third tier" banks that are generally subject to the geographic limitations of the cities in which they are established, will arouse the same investor interest is unclear. Unlike the state-owned banks with vast branch networks around the country, city banks are more vulnerable to swings in local economies. China's more than 110 city commercial banks emerged from restructuring the country's thousands of urban credit cooperatives.

Plenty to Choose From

"Buying city commercial banks is buying economic prospect in the region," says Sandy Hu, an analyst covering the banking industry at Deutsche Bank. "Investors need to worry about a sudden economic slowdown. When the down cycle comes in, they might get hit."

Still, it looks as if investors will have plenty of banks to choose from. Two city banks, Bank of Nanjing and Bank of Ningbo, were given the go-ahead by the China Security Regulatory Committee recently and are expected in the very near future to become the first city commercial banks to list their shares in an IPO. More than half a dozen other banks are also preparing share sales, including Bank of Dalian and Chongqing City Commercial Bank.

The Chinese banking system is dominated by state-owned commercial banks, which control 55% of the country's total $6 trillion banking assets. The total assets of city commercial banks, at $349 billion, count for a little more than one-tenth of that of state-owned banks, according to newest data from the China Banking Regulatory Commission.

Hungry to Buy

The size of these share offerings will also be a fraction of the size of the IPOs last year by ICBC and Bank of China. Bank of Nanjing and Bank of Ningbo aim to raise around $1.5 billion together. Also, most of the city commercial banks that are likely to list their shares will do so on domestic exchanges in Shanghai and Shenzhen, rather than through a global capital market like Hong Kong.

Even so, the wave of bank IPOs could be a welcome development for the overheated and highly volatile stock exchanges on the mainland. The so-called "A-Share" market of listed mainland stocks has been bid up to extreme levels, in large part because of a scarcity of stocks to buy.

"We've seen a sharp correction in the A-share markets last week and one possible reason is that some investors are cashing out to raise liquidity ahead of these IPOs," says Jing Ulrich, chairman of China Equities at J.P. Morgan Securities. "I think we're going to see more city commercial banks going public in order to boost capital and support their expansion plans."

To be sure, a few top-ranking city banks are opting for a dual listing—in both Shanghai and Hong Kong—in hopes of reaching global investors. Bank of Beijing and Bank of Shanghai, among the biggest city banks, have both chosen a Shanghai and Hong Kong dual listing. Bank of Beijing hopes to raise around $8 billion from Hong Kong in the third quarter of this year, according to Xinhua News Agency. Both banks have opened branches in cities other than their home town.

Foreign Investment Limited

Most city commercial banks have brought in outside strategic investors to improve governance and performance before knocking on the doors of stock exchanges. Bank of Nanjing has two strategic investors—BNP Paribas and the International Finance Corporation, the private sector arm of the World Bank. The two investors each own 19.2% and 5% of the city bank, respectively.

Bank of Ningbo sold 12.2% to Singapore's Oversea-Chinese Banking Corp, while ING Group owns 19.9% of Bank of Beijing, and HSBC and International Finance Corporation own 8% and 7% of Bank of Shanghai. Chinese regulations limit foreign investors' stake in a Chinese bank to up to 19.9% for single investors and up to 25% for multiple investors.

Other banks in the listing pipeline are Bank of Dalian, which is hoping to raise around $650 million in a Shanghai IPO after selling a 19.99% stake to Bank of Nova Scotia and 5% to International Finance Corporation. Chongqing Bank is planning an IPO after selling 17% to Hong Kong-based Dah Shing Bank.

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