China Citic Bank, the mainland's seventh-largest commercial lender by assets, is close to appointing Citigroup, Lehman Brothers and HSBC to help arrange a US$1 billion Hong Kong initial public offering, sources said. The three foreign banks were shortlisted for book-running or financial advisory roles after a string of international competitors dropped out or were edged out because of perceived conflict of interest in a heightened political environment. They are expected to work alongside Citic Securities - the Beijing-based bank's investment banking sibling - and China International Capital Corp, Morgan Stanley's mainland investment banking joint venture. Official notifications might come as early as this week, but last-minute changes were still possible, the sources said. The bank, part of the powerful state-backed Citic Group financial holdings, last month invited about 10 domestic and international investment banks, including UBS, JP Morgan, Macquarie and Daiwa, to bid for the mandate. The current shortlist came about after Merrill Lynch, Credit Suisse and Deutsche Bank declined invitations to Citic Bank's beauty parade. All three are involved in the forthcoming international offering of Industrial and Commercial Bank of China (ICBC), which has insisted that foreign banks working on its offering not engage in share sales of other mainland banks around the same time. This led Merrill Lynch and Credit Suisse to relinquish roles in the US$2 billion Hong Kong public offering of China Merchants Bank, expected by September. JP Morgan was named to replace Merrill Lynch on the China Merchants deal, which also involves UBS which is co-sponsoring the continuing US$11.3 billion Hong Kong offering of Bank of China, the nation's second-largest lender. Mega privatisation share sales of state-owned giants have driven foreign investment banks' China revenue for years. Rarely before did conflict of interest become a prominent issue. Initial public offerings by Chinese banks were spaced closer than earlier offerings by rival mainland state giants in the same sectors, bankers said. 'With the end of this year's deadline drawing close for China to fully open its banking sector to foreign players, whichever domestic bank has a strong capital adequacy ratio will be better positioned in the battle for market share,' a banker at a European house said. The size of the estimated US$15 billion ICBC share sale, which may eclipse the Bank of China offering as the largest initial offer by a Chinese firm, may have emboldened the state lender's demand. However, sceptics argue that conflict of interest remains more a political excuse used to undermine rivals than a genuine concern. With the top Chinese leadership still maintaining a say in such decisions and the number of state giants waiting to be privatised dwindling, the contest for mandates has also become more politicised. The exclusion of investment banks from deals on conflict of interest issues was largely the result of political lobbying by rival houses, another banker said.
