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.

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Postal Savings Bank of China is a hefty package. For investors, it comes with a "handle with care" sticker.

First, the heft. This $8 billion IPO candidate counts almost half the people in the world's most-populous country as its customers.

Large investors, including UBS and JP Morgan, bought about 17 percent of Postal Savings' shares in a $7 billion deal in December, almost guaranteeing outsized interest in its public offer.  Throw in 40,057 branches nationwide and 505 million retail customers, and it might appear that the country's sixth-biggest bank by assets is the ultimate investment in China's financial sector.

Yet with nimble fintech players linked to Alibaba and Tencent grabbing increasing amounts of Chinese savers' wealth, heft could be discounted as sloth. Indeed, Postal Savings isn't much of a lender, with a loan-to-deposit ratio of less than 40 percent. One problem is capital: the bank has a Tier 1 ratio of 8.35 percent, quite close to the regulatory minimum.

The IPO will fill that hole, with a bond issue adding ballast. Investors, though, need to be assured they aren't financing hidden losses. On the surface, there seems to be little risk of that. When Postal Savings does lend, the money goes mainly to safe state-owned enterprises. Its biggest corporate borrower is the China Railway Group. The bank's personal loans are mostly to farmers and mortgage borrowers, exposed to the vagaries of both the weather and Chinese real estate policy. But even they are mostly safe.

Postal Savings has a reassuringly manageable nonperforming loan ratio of 0.81 percent.  And while Chinese banks do sometimes understate bad loans, there's the 287 percent loan-loss provision to deal with them. Very few banks in the People's Republic can boast thicker cover.

Plenty of Cover
Postal Savings Bank has a low bad-loan ratio, and ample cushion to absorb losses
Source: Bloomberg, Postal Savings IPO prospectus

Peel off the wrapping, however, and three weaknesses emerge. Start with uninspiring profitability. Postal Savings had a net interest margin of 2.78 percent last year. At least three other lenders -- Huaxia Bank, China Zheshang and Bank of Nanjing -- earned more than 4 percent. Chinese banks with market value of more than $5 billion, on average, clocked a 1 percent return on their assets in 2015, according to data compiled by Bloomberg. The postal lender could only manage to chalk up returns of 0.51 percent, which have since improved to 0.67 percent. 

The second crack shows up in operational controls. Fraud cases have bedeviled Postal Savings in recent years. Take Yang Bing. This former president at one of the bank's branches in Hubei Province gave out 130 million yuan ($19 million) in loans between October 2008 and February 2015 to borrowers with stolen identities, before a clampdown in the middle of last year, according to the IPO prospectus. Identity fraud is barely material -- just 0.03 percent of total loans in April  -- but the slow pace of detection raises a red flag.

Long Shadow
Exposure to wealth management and other shadow banking products classified as recievables
Source: Bloomberg, Company reports

The final vulnerability is the lender's penchant for shadow banking. Postal Savings has 1.7 trillion yuan in investments classified as "receivables." That's 25 percent more than its corporate loan portfolio. About half the amount consists of holdings of special bonds sold by China's policy banks in 2015, plus some listed debt securities. Those should be all right.

But $84 billion is parked in trust investments, asset-management plans and wealth-management products. Among the 15 lenders for which Gadfly has collected data on loans masquerading as receivables, only China Merchants Bank has a bigger entanglement with shadow finance.

Given how concerned investors are with bloated Chinese corporate debt, that involvement puts a "fragile" stamp on this bulky parcel.

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

  1. The last time foreign banks piled into a Chinese lender before the float was when a raft of them were getting listed in Hong Kong in the mid-2000s. That it's happening again will be read by some investors as a sign that the pall of gloom over China's banking industry is starting to lift.

  2. Tencent, and an Alibaba affiliate, are investors in this bank.

  3. That's half the average at China's large banks of 1.73 percent, although in western China, where around 25 percent of Postal Savings' loans are made, nonperforming loans are over 1 percent.

To contact the authors of this story:
Nisha Gopalan in Hong Kong at
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Paul Sillitoe at