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.

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.

The Chinese bank with the biggest branch network in the country is pigging out on capital. Not only does Postal Savings Bank of China hope to scoop up at least $8 billion in an initial public offering this month in Hong Kong, it also plans to raise almost as much money by selling Tier 2 securities.

Postal Savings says it wants to bolster its balance sheet. But does China's sixth-largest bank by assets really need the extra calories? More importantly, can it run fast enough for investors' liking by adding to its spare tires?

The first question is easier to answer. Postal Savings needs to close the gap with its better-capitalized rivals. While the bank's capital-adequacy ratio of 10.26 percent is above the current regulatory minimum of 9.3 percent, it falls short of the 10.5 percent the country's banking watchdog has prescribed for 2018. Bank of Communications, a similar-sized lender, has a far bulkier buffer:

Playing Catch Up
Postal Savings is shoring up its regulatory net capital to close the gap with similar-sized Bank of Communications
Source: Company statements, Bloomberg

The comparison with Bank of Communications unmasks several other reasons why Postal Savings could use some padding.

First of those is asset quality. While the two lenders are analogous by asset size, they have very different risk-weighed assets that also happen to be moving in the opposite direction. As Bank of Communications starts reining in the riskiness of those, the once-staid Postal Savings, which counts state-owned China Railway as its biggest customer, seems to be developing a penchant for living more dangerously.

Risky Affair
Postal Savings Bank's risk-weighted assets as a percentage of total assets is low, but rising fast
Source: Company statements, Bloomberg

Retail advances, which make up half of Postal Savings' loan book, yield 7.1 percent, almost 1 percentage point higher than its peers, according to Sanford Bernstein. If that the premium pricing reflects loans to higher-risk clients, a spike in soured debt could dent profitability, the analysts warn. Add to that the heightened vulnerability to fraud and theft that arises from running 12 times as many branches as Bank of Communications and it becomes clearer why this share-sale hopeful is boosting its defenses.

Yet while the Beijing-based lender builds up a bulwark, the extra buffer is unlikely to do much for its agility.

From investors' perspective, sloth is already a problem. The lender's cost-to-income ratio last year was as high as 61 percent. That's partly because of the hefty "deposit agency" fee it pays its parent, the post office network, which helps it garner retail deposits.  Postal Savings has no way to break free of those fee ties, barring a change in State Council policy.

Even after stripping out that expense, Postal Savings had a cost-to-income ratio of 44 percent, which, according to Bernstein, is 50 percent higher than its competitors.

Postal Savings' capital efficiency is nothing to write home about: Its return on assets was 0.51 percent last year, less than half the 1.1 percent average for 27 publicly traded Chinese banks, according to data compiled by Bloomberg. 

Concerns could be set aside if this mega lender was coming cheap, especially considering a bad-loan ratio of just 0.81 percent shows nonperforming loans aren't as big an issue for Postal Savings as they are for many other Chinese lenders. But as state property, Postal Savings can't be sold for less than book value. Its bigger rivals trade below that.

Investors may not mind footing the bill for Postal Savings' capital feast should it demonstrate a willingness to hit the efficiency treadmill. That commitment, however, is what's missing from its binge.

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

  1. The bank has received permission from the China Banking Regulatory Commission to issue up to 50 billion yuan ($7.5 billion) of such securities, according to Postal Savings' IPO prospectus.

  2. China Post Group owns 83.1 percent of Postal Savings Bank, with the remaining 16.9 percent in the hands of 10 strategic investors including Tencent, which bought in in December 2015.

  3. Risks, though, could lie outside of Postal Savings' mainstream lending business. The bank's investment in commercial banks' wealth-management products has risen a massive 443 percent to 349.2 billion yuan since end-2013, for instance.

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

To contact the editor responsible for this story:
Katrina Nicholas at