China Construction Bank

Bank to give HK a miss for IPO

PUBLISHED : Monday, 28 September, 2009, 12:00am
UPDATED : Monday, 28 September, 2009, 12:00am

Agricultural Bank of China (ABC), the only unlisted bank among the mainland's top four lenders, intends to launch its long-awaited initial public offering in Shanghai only, according to mainland banking sources briefed on the matter.

The move will probably be perceived as a snub to Hong Kong and dash the hopes of international investment banks eyeing handsome underwriting fees.

The mainland's second-largest bank by assets is also unlikely to sell strategic stakes to foreign banks before the IPO, in part because of the backlash triggered earlier this year by international banks scrambling to sell down their stakes in the three other banks to repair balance sheets hit hard by the financial crisis.

Instead, ABC would sell strategic stakes to mainland financial institutions and conglomerates. China Life, the mainland's largest insurer, has already expressed a keen interest in buying a stake in ABC, eying its comprehensive network of branches in rural areas.

ABC is expected to make its final decision after the National Day holiday and inform representatives of international underwriters, who have been lobbying for the mandate for months. It will then formally begin the process of launching the IPO in Shanghai, scheduled for next year. It remains unclear how much the bank plans to raise but the amount should be below the HK$100 billion previously rumoured for a dual-listing.

The intention to skip Hong Kong is likely to cause concern in the city, particularly at a time when Shanghai is stepping up efforts to build up its status as the mainland's leading financial centre. The Ministry of Finance is believed to be the key player pushing for a Shanghai listing only. The ministry owns 50 per cent of the bank, with the remaining half owned by Central Huijin, an investment arm of China's sovereign fund.

Officials at ABC have long wanted to follow China Construction Bank (CCB), the Industrial and Commercial Bank of China (ICBC), and Bank of China (BOC), and list both in Hong Kong and Shanghai, seen as a necessary initial step to becoming an international, modern bank. Pan Gongsheng , an ABC vice-president, reportedly said earlier this year that he preferred a dual listing. But the Ministry of Finance has persuaded the leadership to think otherwise.

Constrained by its rural business, ABC has the weakest capital position and the highest bad-loan ratio among the top four banks - about 23.5 per cent at the end of 2007.

At the end of last year and the beginning of this year, it hived off nearly 800 billion yuan (HK$908 billion) of bad loans and received a US$19 billion capital injection from Huijin as part of its efforts to clean up the books and prepare for the listing. With such a costly tax-funded bailout, it is preferable for the bank to list on the domestic bourse for the benefit of mainland taxpayers, according to officials who argued for a Shanghai listing.

Moreover, the leadership is still reeling from the national backlash caused by the scramble of international banks, including Royal Bank of Scotland, Bank of America, UBS, Goldman Sachs, Allianz Group and American Express to sell down their stakes in BOC, CCB, and ICBC during the height of the financial crisis. Many mainland analysts and state media have openly criticised the fact that these foreign banks bought stakes at a sharp discount before the IPOs and cashed out with billions of US dollars in profits without transferring much technology and expertise to the mainland banks.

Officials at the state lenders have argued that the strategic partnerships helped raise their international profile to ensure successful IPOs amid international suspicions about their quality and management. However, the strong reaction forced the central government to reassess its strategy of selling strategic stakes to foreign banks in return for management know-how.

With China's foreign exchange reserves already topping US$2 trillion, allowing ABC to raise a large sum of hard currency overseas would inevitably put more pressure on the yuan once the bank brings the hard currency home and changes it into yuan. Another reason is that unlike the other three banks, ABC should have less overseas ambitions as its mission is to provide financing for the mainland's 800 million farmers.