Mainland control measures a concern for state-owned bank A heavy concentration of loans to the manufacturing, trading and property sectors could leave listing candidate Bank of Communications (Bocom) exposed if the mainland government adopts further measures to slow the economy. The bank, which began marketing its US$1.9 billion initial public share offering yesterday, admitted in its preliminary listing document that 'any significant or extended downturn ... may reduce the borrowing activities in these sectors, increase our level of impaired loans ... reduce our net profit and adversely affect our financial condition'. At the end of last year, 35.4 per cent of the bank's outstanding corporate loans were made to the manufacturing sector, 13.3 per cent to the trading sector and 12.4 per cent to property, according to the document. The three sectors accounted for 35 per cent, 31.5 per cent and 15.2 per cent respectively of the bank's impaired corporate loans. The property sector in particular is likely to cause some concern among potential investors as the mainland government has recently increased efforts to curb speculative property investments and slow rapid price increases. Mortgage loans also made up 74.6 per cent of the retail loan portfolio. Bocom - the fifth-largest bank in the country in terms of assets and the first state-owned lender to seek a listing in Hong Kong - trimmed its non-performing loan ratio to 3 per cent last year from 11.86 per cent in 2003, largely thanks to the transfer of 53 billion yuan worth of doubtful or loss-making loans to China Cinda Asset Management. This has pushed the bank below the mainland average, allowing the management to present the bank as an 'industry leader in terms of asset quality and capital adequacy ratios'. However, the lender - which is aiming for a June 23 trading debut - did see a 96.5 per cent rise in the amount of special-mention loans last year to 98.39 billion yuan, or 15.4 per cent of its loan book, due to the macroeconomic measures. These types of loans are considered at risk if adverse conditions prevail. In a pre-offering research report, Goldman Sachs estimated that 25 per cent of the special-mention loans could become non-performing loans. Bocom will offer 5.85 billion shares at between $1.95 and $2.55 each. This will value the company at 11.1 to 14.5 times its net profit this year, which is expected to be at least 7.87 billion yuan, or at 1.39 to 1.82 times its projected post-listing book value if the offer is priced in the middle of the range. The price is slightly higher than the 1.86 yuan per share that HSBC paid for a 19.9 per cent stake in the company in August last year. Goldman and HSBC are joint global co-ordinators for the offer.