Local banks march to Hong Kong

Three regional lenders are moving ahead with Hong Kong IPO plans due to a need for cash, but may be forced to scrap their plans if sentiment doesn't improve

PUBLISHED : Tuesday, 25 June, 2013, 12:39pm
UPDATED : Tuesday, 25 June, 2013, 12:39pm

The ongoing cash crunch at Chinese banks may be partly behind reports that a trio of regional banks are aiming to make IPOs in Hong Kong, with Bank of Shanghai, Huishang Bank and CGB all aiming to list in the second half of the year. These regional lenders may also be losing patience while waiting for China to lift a freeze on new IPOs that dates back to last year, which has led to a backlog of dozens of companies that want to make offerings. The China Securities Regulatory Commission (CSRC) had been giving signals that it could soon lift the freeze, though it may change its mind if the current sell-off on Chinese stock markets continues.

These Chinese regional lenders are among some of China's more dynamic banks, with less bureaucracy than the big national behemoths like ICBC (1398.HK; Shanghai: 601398) and China Construction Bank (0939.HK; Shanghai: 601939). But their smaller size and more regional focus often means these regional players lack the connections needed to get priority for listings on China's stock exchanges, which is why many remain unlisted to date.

Many of these banks also have complex stakeholder structures that need to be unraveled before a listing can be made. And equally important, many must also go through the process of disposing of long lists of bad assets accrued over decades when they were policy lenders that took many of their orders from local governments.

All that said, let's take a look at the latest reports that say Huishang, based in interior Anhui province, is the most advanced in its process for seeking a Hong Kong IPO. The reports say the bank plans to make its formal application next month, and aims to raise US$1 billion to US$1.5 billion around October.  They add that underwriters for the offering include CITIC Securities, along with foreign names JP Morgan, Morgan Stanley and UBS.

Bank of Shanghai and CGB would follow suit with plans to submit their IPO applications in August. Guangdong-based CGB, which counts Citigroup (NYSE: C) among its major stakeholders, is hoping to raise about US$1.3 billion, while Bank of Shanghai is hoping to raise between US$1 billion and US$1.5 billion, the reports say.

So, what do I think of these offerings? In terms of timing, they certainly don't look too good as shares of big Chinese banks have taken a beating in recent weeks due to concerns about the slowing economy and bad loans. The downward pressure on their stocks has accelerated in the last week, as the banks face a liquidity crisis created by the sudden exodus of so-called "hot money" from China.

ICBC's and China Construction Bank's Hong Kong-listed shares are both down about 15 per cent this month alone. Smaller, more regional lenders are faring even worse, with Hong Kong-listed shares of Shanghai-based like Minsheng Bank (1988.HK) down 23 per cent for the month. The big banks may be faring slightly better because their controlling stakeholder, Central Huijin, has stepped in to buy their shares amid the sell-off. (previous post) The smaller banks have no such patron to take similar actions.

These three regional banks are probably feeling their own cash crunches, which would partly explain their determination to make IPOs in such a miserable climate. Then again, none of these new offerings would get to market until October or later, which is still more than three months away. Perhaps sentiment will finally settle down by then, allowing investors to buy into some of these interesting regional banking plays at what are likely to be very attractive prices.

Bottom line: Three regional lenders are moving ahead with Hong Kong IPO plans due to a need for cash, but may be forced to scrap their plans if sentiment doesn't improve.

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