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IPO

IPO

China’s Postal Savings Bank taps mainland institutional support for US$8.1b IPO amid market concerns over risks

PUBLISHED : Tuesday, 13 September, 2016, 9:24pm
UPDATED : Tuesday, 13 September, 2016, 11:03pm

Postal Savings Bank of China has warned investors of the risks it faces, including a high concentration of its loan portfolio with China Railway Group and uncertainty in maintaining the current scale of its outlets, as it prepares to launch what will be the world’s biggest initial public offering of the year.

Despite the warnings, some sources said 90 per cent of the offer marked for institutional investors was fully subscribed to as of 8pm Tuesday night thanks mainly to mainland Chinese institutional investors stepping up to the plate even as international investors remained cautious.

In disclosure documents provided to investors, the bank said China Railway was its largest single borrower, with its credit exposure to the railway firm standing at 248.2 billion yuan, representing as much as 74.32 per cent of its regulatory capital as of March 31.

While the bank runs a lower loan balance than the big four state-owned banks – only 40 per cent of its deposits are loaned out compared to the industry’s average 70 per cent – banking analyst Wei Hou at Sanford Bernstein estimates Postal Savings’ exposure to China Railway represents as much as 20 per cent of the lenders corporate loan business.

At a press briefing on Wednesday Lyu Jiajin, Postal Savings president, admitted the figure was high but said it was due to historical reasons. “When Postal first started, it was built as a railway deposit institution,” he said. “Rail in China was a high growth, low risk sector. The loans were made under regulatory support and approval. China Railway represents a good quality asset.”

Rail in China was a high growth, low risk sector. The loans were made under regulatory support and approval
Lyu Jiajin, Postal Savings president

The bank, which has 40,057 domestic outlets, almost double that of the next largest player Agricultural Bank of China, also warned of uncertainly in maintaining such scale, even though its wide national coverage amid China’s rapid urbanisation was one of the major selling points pitched by underwriters to investors. Wei Sun Christianson, Asia Pacific co-chief and China chief of Morgan Stanley, said the bank could provide financial services to meet the demands of up to a third of China’s population.

“The bank faces risks relating to its agency outlets,” Postal Savings said in briefings provided to investors. “If the bank is not able to maintain the current scale of outlets, the bank’s competitiveness and results of operations could be adversely affected.”

The bank’s management said it will need to optimise costs in relation to the outlet presence, possibly by developing a strong online banking presence.

China’s banking industry eliminated over 30,000 jobs in the first half of the year, as most major banks reported flat profits.

Amid such concerns and the poor investment outlook in China’s banking sector, fund managers in Hong Kong said Monday that the offer had attracted limited interest from international investors, with few committing to buy the shares.

The bank pulled in six cornerstone investors with commitments to buy US$5.9 billion of stock equal to 76 per cent of the shares on offer, for its initial public offering set to launch on Wednesday in Hong Kong.

The two largest cornerstone investors are China State Shipbuilding Corp and Shanghai International Port (Group), committing US$2 billion each. Others include US$1 billion from HNA Group, US$300 million from State Grid, US$150 million from Chengtong Group and US$100 million from Great Wall Asset Management.

The cornerstone investors are subject to a six month lock up, according to a sales briefing document provided to investors today and seen by the Post. Further, strategic investors who previously subscribed to Postal Saving’s pre-IPO share deal in December last year at undisclosed discounts are required to hold their shares until December 2018.

Postal Savings plans to sell 12.1 billion shares on the Hong Kong stock exchange at an indicative price range of between HK$4.68 and HK$5.18 per share, raising between US$7.3 and US$8.1 billion. The range represents a valuation of between 0.93 and 1.02 on an expected book value of 298.9 billion yuan for 2016, as estimated by the six joint sponsors.

Order taking for the shares will begin on Wednesday. The bank will price the offer on September 21 in Hong Kong after a global roadshow to attract investors, and its shares will begin trading in Hong Kong on September 28.

Five investment banks will serve as joint sponsors to the deal, including Bank of America Merrill Lynch, CICC, Morgan Stanley, Goldman Sachs and JPMorgan. UBS is the financial advisor to the offer.

An additional 16 financial institutions are supporting the offer as bookrunners and lead managers. DBS, China Merchants Securities, HSBC and Citi are among the global names featured on the bank’s term sheet published Tuesday.

Marco Polo Pure Asset Management chief executive Aaron Boesky said market conditions and market approval for the lender’s leadership and banking strength would likely buoy the shares upon the start of trading.

“I think the liquidity in general public savings is more than ample. This is evident in the large cash flows we see in and outside China,” Boesky said.

The bank’s Tuesday briefing was launched with a star-studded cast including UBS chief Sergio Ermotti, JPMorgan chairman Jamie Dimon and DBS chief Piyush Gupta appearing in the bank’s promotional video.

The Postal Savings offer is the largest of its kind by a mainland bank since the debut of Agricultural Bank a decade ago. The remaining 10 per cent of the shares will be available for public offer on Wednesday.

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