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.

It doesn't bode too well for Hong Kong's IPO market that the first significant deal to be priced this year in the world's biggest fundraising venue is a rural Chinese bank. 

On top of well-documented problems like a large exposure to wealth-management products and rising bad loans, Jilin Jiutai Rural Commercial Bank Co. has to cope with the high level of operational risk that comes from being a holding company for 37 other lenders, of which 21 are majority owned and 16 aren't.

Conglomerates generally have some sway over their units, yet Jiutai Rural happily admits in its listing prospectus that it not only hasn't integrated various risk-management and IT systems, but also "cannot assure you that the subsidiary banks will always operate their businesses in the way expected."

Jiutai Rural has grown by acquiring lenders in small villages and towns, a strategy that's helped boost assets but also exposure to soured loans and shadow banking. As of June 30, the group's investments in debt instruments issued by other financial institutions, including asset-management plans, trust plans, beneficiary certificates and wealth-management products, was 32.03 billion yuan ($4.6 billion), or 20 percent of total assets. They're all classes of investments that should ring alarm bells with investors.

Bad Loan Rising
Jiutai Rural Commercial Bank has seen its nonperforming loan ratio increase as it buys stakes in other small lenders
Source: Jiutai Rural listing prospectus

What's more, most of Jiutai Rural's operations are in hard-bitten northeastern China, which is dominated by mining and industrial companies. The lender makes 87.5 percent of loans and receives 90.3 percent of deposits from Jilin province, which borders North Korea and Russia, and says that any adverse change in the area's economic development could materially affect business.

Jiutai Rural is expected to list Thursday after raising HK$2.6 billion ($335.3 million) selling shares at HK$4.56 apiece, near the bottom of its HK$4.54 to HK$4.76 range. That all the bank's float was taken up probably has something to do with its pledge to distribute at least 40 percent of profits as dividends in each of the fiscal years through 2018. However, investors are unlikely to see huge gains if peer Chongqing Rural Commercial Bank Co.'s performance is anything to go by.

Regional Rejection
Chongqing Rural Commercial Bank has underperformed the benchmark Hang Seng Index, showing investor distaste for rural lending in China

As Hong Kong tries to move beyond being largely a funding center for staid Chinese state-owned enterprises, 2017 doesn't look off to the hottest of starts.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at

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