Jilin Jiutai set to start trading, but optimism low of success for other Chinese rural commercial banks seeking IPOs
Analysts expect more smaller Chinese rural banks to seek listings this year – but they warn of low investor interest, given many have performed relatively poorly of late, and the current high levels of regional financial risks
Share trading in Jilin Jiutai Rural Commercial Bank debuts on Hong Kong Stock Exchange on Thursday, becoming only the second mainland rural commercial lender to be offered in the city – six years after Chongqing Rural Commercial Bank, which raised a net of HK$10.29 billion in an initial public offering (IPO) in December 2010.
Analysts now expect more smaller Chinese rural banks to seek listings this year, but they also have serious doubts whether investors will have much appetite for their shares, given many have performed relatively poorly of late, and the current high levels of regional financial risks.
The biggest rural commercial bank in northeast-China, Jilin Jiutai set its offer price on Wednesday at HK$4.56 per share, close to the lower end of its initial indicative range of between HK$4.54 to HK$4.76. It raised a net HK$2.55 billion, after being oversubscribed by just 9 per cent for its retail tranche.
China’s rural commercial banks are supposed to serve what are called the “Three Rurals” – a short term for issues related to agriculture, rural areas and rural households within a region.
Headquartered in Changchun, the capital and largest city of Jilin Province, Jilin Jiutai’s assets and revenues have been growing fast, through acquisitions of rural credit cooperatives and cooperative banks.
Its net profit increased 50.8 per cent, from 534.6 million yuan in 2013 to 1.2 billion yuan in 2015, according to its IPO prospectus.
That compares with an average 12.1 per cent growth of commercial banks listed in the mainland and Hong Kong.
Guangzhou Rural Commercial Bank, which is 24.06 per cent owned by the Guangzhou government, also filed for an IPO in Hong Kong last week, while Chongqing Rural Commercial Bank was also given regulator approval for an A-share offering.
Ringo Choi, Asia-Pacific IPO Leader at auditing firm EY, says he expects more share sales of rural commercial banks this year, either in Hong Kong or the mainland.
“These banks are government-policy-driven. Some of them will chose Hong Kong for an IPO as they are likely to need to satisfy the service demands of agricultural companies in overseas markets in future, such as for procurement of products or acquisitions,” Choi said.
Five rural lenders became the first of their type to float in the mainland in the second half of last year and around 20 are preparing for IPOs either in the mainland or Hong Kong, according to recent figures quoted by 21st Century Business Herald .
However, market watchers, including Castor Pang Wai-san, head of research at Core Pacific Yamaichi, doubt whether Hong Kong investors in particular will show much interest in them, based on fears over regional risks, sustainability of growth, and asset quality.
“I don’t think those banks are worth buying. Jiutai’s profit growth largely depended on acquisitions which are not organic or sustainable,” said Pang.
“There are already many banks listed in Hong Kong for investors to choose from. You could accurately describe these rural commercial banks as only in the ‘second-tier’, of the ‘second-tier banks’.”
Jiutai’s non-performing loan ratio was 1.26 per cent, 1.19 per cent, 1.42 per cent and 1.57 per cent between December 31, 2013, 2014, 2015, and June 30, 2016, while its provision coverage ratio – a measure of a company’s ability to meet its financial obligations – was 220.09 per cent, 233.4 per cent, 206.86 per cent and 198.18 per cent for the same periods, on a consolidated basis.
Guangzhou Rural’s non-performing loan ratio was 1.79 per cent as of September 30 last year.
The NPL ratio for all Chinese commercial banks was 1.76 per cent at the end of September, up from 1.75 per cent by June, according to China Banking Regulatory Commission.
A dominant 92 per cent of Jiutai’s operating income in the first half of 2016 was from Jilin province, but 90.2 per cent of Guangzhou Rural Commercial Bank’s loans were made to customers in Guangzhou city during the first nine months of last year.