CCB's attractive figures belie its long-term face value
China Construction Bank will have little difficulty drumming up the $48 billion to $60 billion it needs to ensure a successful initial public offering. As the first of China's Big Four state banks to reach the market, it has significant novelty value.
The stock's initial performance after its listing should be respectable, too. CCB's size is likely to win it inclusion in a parcel of indices, attracting enough buying from index-following funds to generate a healthy return for opportunistic investors who flip early.
Whether CCB turns out to be such a good long-term buy is more doubtful. At an indicative price range of $1.80 to $2.25, or 1.6 to 1.9 times book value, the shares are not being sold cheaply.
With nearly 14,500 branches, almost a quarter of a million staff and the majority of its corporate loans extended to state enterprises, it has taken years of window dressing to tease CCB into shape for listing. Since 1998, the bank has been given government handouts worth more than 300 billion yuan and has sold almost 380 billion yuan worth of non-performing loans to a state asset management company on extremely favourable terms.
Assuming those bad loans were worth 20 per cent of their face value, Beijing has injected 540 billion yuan to prepare CCB for flotation. That is more than the bank's market capitalisation will be worth on listing, even if its shares are priced at the top of their indicative range.
The generosity of the bailout, together with a rapidly expanding loan book, has enabled CCB to cut its ratio of non-performing loans (NPL) from levels as high as 50 per cent in the late 1990s to just 3.9 per cent at the end of June.
The reduction in bad loans, along with a new focus on growth businesses such as mortgages and credit cards, makes an attractive story to spin to investors. The risk is that despite extensive restructuring, CCB has not changed its old behaviour while picking up some new bad habits.
Even after listing, the finance ministry, through its vehicle Huijin, will own more than 70 per cent of CCB's shares and retain the power to appoint the majority of the board. In its preliminary prospectus CCB bluntly states: 'Huijin may take actions ... that are not in the best interests of our bank or our other shareholders'.
In other words, the state still will call the shots. Lending to state-owned enterprises, which makes up most of CCB's corporate loan book, will continue even if repayment is doubtful.
With the economy growing fast, that is not a great problem. But if growth moderates, CCB's bad loan ratio could rise rapidly. 'Special-mention' loans, or those likely to sour, stand at 14 per cent of its portfolio while property loans, at least 15 per cent of the total, are turning bad at an alarming rate.
CCB's favoured growth areas also pose big dangers. It is fast expanding into mortgage lending, which now makes up 14 per cent of its portfolio, yet is barred by law from evicting defaulters from their homes. Credit-card lending is risky, too, in a country with no history of consumer credit.
Despite the risks, CCB is unlikely to get any further government handouts to bolster its capital and allow it to write off bad loans. That means the NPL ratio could well rise after the offering.
Investors should be warned that after years of expensive massaging to get CCB into shape for its listing, it could be a very long time before the bank's figures look this good again.