China's ICBC: The World's Largest IPO Ever

The mainland's top bank is offering $19 billion worth of shares. With China's growth topping 10%, it's no wonder investors are flocking

Well it's official. On Sept. 27, China's mega-lender and biggest mainland bank, the Industrial and Commercial Bank of China (ICBC), disclosed details of its upcoming $19 billion share offering in Hong Kong and Shanghai that will go down in history as the world's biggest initial stock listing. And judging by the overwhelming investor responses to previous share offerings by China Merchants Bank and Bank of China this year, get ready for a stampede.

ICBC certainly has a lot going for it. It is the mainland's biggest bank with $815 billion in assets and some $415 billion in outstanding loans. And it is No. 1 in corporate and personal banking in China and has as branch network of some 18,000 branches, according to an initial sales document posted on the Web site of the Hong Kong Stock Exchange. (The ICBC offering documents can be found here.)

ICBC is forecasting a 47% increase in earnings this year to nearly $7 billion. "The bank has a very strong franchise in China," says May Yan, vice-president and senior credit officer with Moody's Asia Pacific in Hong Kong. "It's the biggest in almost every banking business."


  And thanks to government help, both in outright capital injections and purchases of non-performing loans, ICBC's balance sheet is a lot stronger than in recent years. Its capital adequacy ratio is 10.7% and the ratio of dud loans to its overall loans has fallen to 4.1% as of June of this year from 21% at the end of 2004.

Small wonder that ICBC has attracted the likes of Goldman Sachs (GS), German insurer Allianz (AZ), and American Express (AXP) as strategic investors. They have collectively spent $3.8 billion for an 8.5% stake in the bank ahead of ICBC's offering that will start trading on Oct. 27. Another $3.7 billion will be sold to an array of corporate investors such as China Life Insurance, Hong Kong tycoons and the investment arms of governments such as Kuwait, Qatar, and Singapore.

The rest will be up for grabs among mainland investors for the Shanghai portion of the offering of about $5 billion and global investors via the Hong Kong side, where the plan is to raise $14 billion. Judging by recent offerings, the ICBC listing will be heavily over-subscribed. Two big mainland state-owned banks, China Construction Bank and Bank of China, had little trouble selling a combined $22 billion-plus worth of share offerings over the past year in listings in Hong Kong and Shanghai (see, 5/31/06, "A Golden Age for Chinese Banks").


  If you want a China play with broad exposure to the mainland economy, it's hard to pass up big banks that lend to so many different industries and will benefit from the country's prospering and growing middle class. "The financial sector is really one sector that you need to invest in" to capitalize on the China growth story, Tat Auyeung, a fund manager at Apex Capital Management in Hong Kong, told recently.

Also, the economy grew 10+% during the first half of 2006 and deposits are rolling into Chinese banks at a double digit pace (see, 9/5/06, "Chinese Bank Stocks: What, Me Worry?").

Chinese bank stocks have generally done well post-IPO, too. China Construction Bank's share price has appreciated more than 40% since its IPO last October. China Merchants Bank shot up 25% in its first day of trading on Sept. 22. The betting is that ICBC could well come out of its IPO with a market capitalization of $180 billion-plus.


  The big challenge of ICBC will be shaking its old corporate culture as a state-owned bank and transforming itself into a commercial one that can assess risk and be globally competitive. On top of that, while its balance sheet looks strong now, that could change quickly if China's blistering economy falls into a boom and boost cycle. "If somehow the economy slows down, there could be potential asset quality weakening," says Yan with Moody's.

What will ICBC do with the proceeds? A big chunk will be spent to upgrade its domestic operations and extend its lead in corporate lending and the potentially huge credit card market in China. It doubtless has international ambitions in Asia as well and may well try to acquire banking assets abroad. In any case, this is an IPO that is going to turn some heads for its sheer scale.

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