JPMorgan, UBS Can’t Match China Bank Bonanzas of Decade AgoBloomberg News
Pre-IPO gains on postal bank stakes down from ‘golden age’
Postal bank priced shares near low end amid weak demand
Jamie Dimon and Sergio Ermotti starred in the roadshow promoting Postal Savings Bank of China Co.’s share sale. Yet the executives’ participation in this year’s biggest initial public offering also serves as a reminder that investing in Chinese banks isn’t what it used to be.
When China’s fifth-largest bank priced its $7.4 billion share sale last week, UBS and JPMorgan snared 5 percent paper gains on investments made nine months earlier. The shares will start trading in Hong Kong on Wednesday after being priced near the bottom of a marketed range.
Bank of America Corp. and Goldman Sachs Group Inc. more than doubled their money with China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd. stakes respectively in 2005 and 2006 before those firms’ shares started trading. History is failing to repeat itself as investors fret at the risks weighing down Chinese lenders.
JPMorgan’s first purchase of a stake in one of the biggest Chinese lenders came a decade after a wave of bank IPOs in China generated multibillion-dollar windfalls for foreign banks. Goldman and Bank of America bought in before the global financial crisis when the Chinese economy was booming and sold after post-crisis banking rules made it more expensive to hold minority stakes.
In a video played at roadshow briefings in Hong Kong and London, Dimon, 60, and Ermotti, 56, highlighted “strategic” tie-ups with Postal Savings Bank. JPMorgan will provide advice for the Chinese lender’s retail finance business and help it to bolster trade finance capabilities, while UBS will aid efforts to provide wealth management services, according to the share sale prospectus.
Spokesmen for JPMorgan, which is among joint sponsors of the IPO, and UBS, the sole financial adviser to the offering, declined last week to comment further.
Ten strategic investors put 45.1 billion yuan ($6.8 billion) into the bank in December. UBS accounted for the largest share at 13.3 billion yuan, while JPMorgan took a 2.5 billion yuan stake. UBS could syndicate a significant portion of its stock to other investors, people familiar with the matter said ahead of the purchase.
Global investors have become increasingly concerned that a rising tide of bad loans will threaten banks and the economy. The expansion in gross domestic product has cooled this year to a 6.7 percent pace.
While the lender’s stock was priced near the low end, its valuation as measured by its price-to-book ratio is higher than those of other big state lenders. The stock fell as much as 2.3 percent to HK$4.65 on Tuesday in a grey market operated by Phillip Securities Group.
“I won’t be surprised if Postal Savings Bank’s shares fall below the IPO price on their debut," said Li Bin, a Shanghai-based analyst at Capital Securities Corp. “Their strategic investors must look at the deal from a very, very long-term perspective, betting they will be compensated by something else -- such as extra local government support for their own China businesses.”
UBS made a pre-IPO gain of about 160 percent in nine months on a $492 million investment in Bank of China Ltd. in 2005. The Swiss lender reaped about 35 percent on paper when a “bad bank” -- China Cinda Asset Management Co., a manager of nonperforming loans -- priced its initial share offer in 2013.
Bank of America reaped 110 percent in two months from buying a $2.5 billion holding in China Construction Bank. Goldman Sachs more than doubled the value of its $2.6 billion stake in Industrial & Commercial Bank of China in six months. The gain was one of the firm’s biggest investment wins since being founded in 1869, people with knowledge of Goldman’s investments said at the time.
Those investments were made “during the golden age of the Chinese economy,” said Richard Cao, a Shenzhen-based analyst at Guotai Junan Securities Co. “Now, it’s a different time, so that kind of return is not realistic.”
The global financial institutions that spent $33 billion buying stakes in Chinese lenders from 2001 and 2009 mostly later exited -- leaving the likes of HSBC Holdings Plc, with its shareholding in Bank of Communications Co. Goldman Sachs earned about $12 billion in sales proceeds and dividends from its seven-year investment in ICBC, while Bank of America reaped at least $15 billion after buying in to Construction Bank.
The strategic investors in Postal Savings Bank face a three-year lock-up on their investments.
Ubiquitous in small-town China with 500,000 customers, the bank is the last major state-controlled lender to sell stock publicly to fund expansion. In a sign of what’s changed, Chinese bank shares have lagged behind the benchmark Hang Seng Index in Hong Kong for five of the past six years while their profit growth has slumped to the lowest level in a decade.
While Postal Savings Bank’s strengths include an extensive network, a strong deposit base, and a non-performing loan ratio less than half that of the industry as a whole, it also has weaknesses. In a note this month, analysts at Sanford C. Bernstein & Co. highlighted inefficiencies, concentrated lending -- including a large exposure to the cash-burning China Railway Corp. -- and increased shadow-banking exposures, such as investments in asset management plans.
Adding to concerns about the industry, a Bank for International Settlements warning gauge for banking stress rose to a record in China in the first quarter, after an explosion in credit since the global crisis.
At the same time, the government’s control of the banking system and of the levers of economic policy may limit the risk of a Chinese financial crisis.
“Although there’s a low probability that China’s banks and the Chinese economy can recover any time soon, we should never underestimate the capacity of the Chinese government,” Li said. “If that day comes, those who still have bets on China will do well.”
— With assistance by Jun Luo, Alfred Liu, and Cathy Chan