Photographer: Qilai Shen/Bloomberg

China’s Looming $8 Billion IPO Has Risks Tied to Shadow Banking

  • Postal Bank prelisting data shows interbank investment surge
  • Investors could question lender’s reputation as safe, sleepy

Postal Savings Bank of China Co., the company preparing for an initial public offering that may raise $8 billion, has plunged into shadow-banking arrangements that could make investors question its reputation as sleepy and safe.

QuickTake Shadow Banking

The Beijing-based lender, ubiquitous in small-town China, disclosed 953 billion yuan ($143 billion) of interbank investments in “special purpose vehicles” in a prelisting document filed to Hong Kong’s stock exchange on Monday.

Those holdings of wealth management products, trust investment plans, asset management plans and securities investment funds have almost doubled since 2014 and are up more than 500 percent since 2013. The lender didn’t immediately respond to an e-mail seeking comment.

“I think this is a temporary maneuver aimed at boosting its earnings before the IPO,” said Wei Hou, a Hong Kong-based analyst at Sanford C. Bernstein & Co. “During its future roadshows, this will be an area that investors will focus on in terms of the scale and long-term strategy of such an exposure.”

The bank, which will be the last of China’s big lenders to list, is seeking to raise $8 billion in what could be the world’s largest IPO this year, according to people familiar with the matter.

Skirting Requirements

Postal Savings Bank has followed mid-sized and smaller lenders in piling into the arrangements, which can be used to skirt capital and provisioning requirements. The deals can also channel money to borrowers who don’t qualify for loans, such as businesses in industries with overcapacity, such as coal and steel. The intermediaries include securities firms, trust companies and other banks.

In a report late month, Moody’s Investors Service said that while investments in loans and “receivables” -- including products such as asset management plans -- could boost banks’ earnings and provide asset diversification, they also raised “multiple credit concerns.” These included liquidity and interest-rate risks.

In a note, Bernstein’s Hou said that a jump in Postal Savings Bank’s receivables was a “potential concern” and that he’d be seeking more information from the bank. While Bernstein viewed the bank as “sleepy and inefficient” but safe, the investment surge could undermine “the ‘safe bank’ thesis,” he said.

Interest Income

In the prelisting document, the lender said that it had “very limited” exposure to high-risk sectors such as real estate, local government investment vehicles, and industries with overcapacity.

The interbank investments provided interest income of 35.5 billion yuan last year, more than double the amount in 2014. In the first quarter of this year, the bank booked 10.7 billion yuan of income from the investments.

The bank could be exposed to any deterioration in the finances of the ultimate borrowers in the underlying transactions and “we do not have direct recourse,” it said in the prelisting document.

The lender held 349 billion yuan of banks’ wealth management products as of March 31, up 115 percent from 2014, the document showed.

Contagion Risks

WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other, adding to the risk of contagion when products go bad.

In the prelisting document, Postal Savings reported an 11 percent increase in first-quarter profit as it pared back provisions for bad loans by more than half even as soured debt rose. A single borrower, China Railway Corporation, accounted for 9.1 percent -- or 243 billion yuan -- of the bank’s loans as of March 31.

Even after raising $7 billion selling about 17 percent of itself to strategic investors in December, the bank’s core tier-1 capital adequacy ratio fell to 8.35 percent in March from 8.53 percent at the end of 2015.