Beijing-based Huaxia Bank has been given the go-ahead for an A-share initial public offering (IPO), signalling an acceleration of the corporatisation trend that is forcing mainland banks to adopt market-based discipline. The IPO was approved by the China Securities Regulatory Commission at a listing committee hearing on Christmas Day, according to mainland sources. The 151-branch small- to medium-sized bank will become the fifth bank to be listed on a mainland exchange. Beijing's long term aim is for the Ministry of Finance to shed its role of financing the big four state banks as they turn instead into shareholding companies accountable to external investors. Huaxia's IPO details were not revealed yesterday, but the bank previously said it aimed to issue one billion shares at about four to five yuan apiece. It also planned to sell a stake to a strategic foreign partner before listing. Based on previous estimates, the bank could raise up to five billion yuan to raise its capital adequacy ratio and bolster its ability to withstand risk. The official launch date of the IPO could come in weeks or months. Bank of China International and China Southern Securities are joint underwriters. Bank officials yesterday declined to comment. The development comes days after Citic Securities attracted 357 times subscription for its 1.8 billion yuan A-share IPO - the first by a mainland brokerage. It remains to be seen whether Huaxia Bank can attract the same level of interest, but analysts in Hong Kong were sceptical in view of the bank's reputation for being a captive lender to its major shareholders, state-owned steel giant Shougang Corp. Arthur Lau, China director for Fitch ratings agency in Hong Kong, said: 'As a spin-off of Shougang Corp, the bank's biggest concern is the amount of related-parties loans advanced to its major shareholders.' Under People's Bank of China (PBOC) rules, a bank is prevented from advancing loans of more than 10 per cent of net capital to a single borrower. Net capital is equal to total shareholders funds after equity investments in other financial institutions. Total loans advanced to a bank's top 10 borrowers are also capped at 50 per cent of its net capital. According to Mr Lau, Huaxia Bank at times advanced as much as 40 per cent of its net capital to its top single borrower about two years ago, although the ratio has come down recently at PBOC's request. The aim is to bring down the level to 20 per cent ahead of its listing, he said. Mainland bankers said Huaxia Bank's close connections with the government had helped it exceed the 10 per cent cap with special permission from the PBOC. The bank was set up in 1992 by Beijing-based Shougang Corp with registered capital of 2.5 billion yuan (about HK$2.34 billion). Shougang chairman Zhou Guanwu was a close friend of late leader Deng Xiaoping, which helped turn Shougang into a one-time flagship state-owned enterprise in the early 1990s. Closer inspection of the bank's credit quality in the past two years by Fitch revealed that it is the most aggressive mainland lender. Its non-performing loans (NPLs) last year jumped 74.9 per cent to 4.67 billion yuan from the previous year, following a 55.2 per cent surge in 2000. In the first half of this year alone, its NPLs reached 4.76 billion yuan. However the bank's NPL ratios - more commonly watched by the PBOC for bad loans - have not been rising as quickly as its absolute NPLs. Its NPL ratio was 5.4 per cent in 2000, rising to 7.1 per cent last year. In the first half this year it edged down to 6.32 per cent. The surge in absolute NPLs - but with stabilising NPL ratios - reflect a sharper growth in the bank's loan books than in NPLs. The bank's rapid expansion policy may have come at the expense of proper controls on asset quality and risk management, and could result in new loan problems, according to Mr Lau.