Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Even China's most quintessentially official financial institution needs capital, and it's turning to investors, not the government.

Postal Savings Bank of China, the nation's biggest by branches, filed for an $8 billion IPO, people familiar with the matter told Bloomberg News. That was about a week after the lender got approval from the China Banking Regulatory Commission to sell 13.96 billion shares in Hong Kong, to replenish capital. The bank certainly needs it.

Capital Shortfall
Despite its heft, Postal Savings Bank was undercapitalized the last time it reported its position
Source: Initial public offering prospectus filed on Sept. 1 2015

According to the deal prospectus filed in September 2015, Postal Savings Bank's capital-adequacy ratio was at 9.6 percent at the end of 2014, the last time it was reported. Nonperforming loans eat into a bank's capital as they increase impairments and provisions, both of which can reduce equity. The soured-debt ratio of Postal Savings is one of the lowest in the system, at 0.64 percent by the end of 2014. Still, the lender is unlikely to have escaped the broader upward trend of the past two years.

Rising Delinquencies
The share of Chinese loans that go bad has risen more than 60 percent in three years
Source: Bloomberg

Regulators require China's biggest banks to have a capital-adequacy ratio of 8 percent, plus a conservation buffer of up to 2.5 percent; an extra percentage point is applied to systemically important financial institutions. The total 11.5 percent is at least two percentage points higher than where Postal Savings Bank was 18 months ago.

Investors will see more up-to-date numbers as the deal progresses. But it's clear the bank needs capital, and with the 6.3 trillion yuan ($947 billion) in assets it held at the end of 2014, $8 billion may not be enough.

That may, however, get the bank above the waterline when added to the capital boost Postal Savings received in December, when it raised $7 billion by selling a 17 percent stake to investors including UBS and JPMorgan in a transaction that valued China's sixth-biggest bank by assets at about $41.5 billion.

Discounted Value
All of China's large financial institutions are trading below book value
Source: Bloomberg

That deal was done at a price-to-book ratio slightly above 1. Now the challenge will be to persuade other investors that they should pay at least book value in the IPO, while Postal Savings Bank's peers all trade at a discount.

Investors should demand a similar discount of Postal Savings. While it's hard to imagine the bank being allowed to run into trouble, it's easy to see this call on markets being the first of several.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Christopher Langner in Singapore at clangner@bloomberg.net
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net