Postal Savings Bank off to a stuttering start in Hong Kong after US$7.3 billion IPO

The bank’s shares moved just 0.21 per cent higher on Wednesday, their first day of trading, one of the worst debuts on record among big IPOs

PUBLISHED : Wednesday, 28 September, 2016, 9:38am
UPDATED : Wednesday, 28 September, 2016, 11:00pm

Postal Savings Bank of China’s US$7.3 billion initial public offer, the world’s biggest for two years, quickly became one of the worst debut performers among giant IPOs, as investors shunned it for its high valuation.

Shares of the bank traded in a tight range on their first day, closing at HK$ 4.77, up just 0.21 per cent or 1 HK cent from the offer price of HK$4.76, which came in at the lower end of a price range.

Among the 17 global IPOs exceeding US$7 billion in value, where data is available, Postal Bank’s debut premium of 0.2 per cent was the second lowest, according to Bloomberg.

Postal Bank’s first-day performance compares unfavourably with other Chinese lenders whose IPOs made the top 17.

High cornerstone coverage hasn’t been great for post-listing performance. This deal is unlikely to be an exception
Sumeet Singh, analyst, Smartkarma

When Industrial and Commercial Bank of China (ICBC), the largest bank by assets globally, debuted 10 years ago with its US$16.1 billion offering - the biggest on record at the time - its shares climbed 14.66 per cent on the first trading day.

Bank of China jumped 15.25 per cent after its US$11.16 billion flotation in 2006, and Agriculture Bank of China managed to add 0.75 per cent in day-one trading following its US$10.04 billion offering in 2010.

Despite barely moving, Postal Bank, which operates more branches in the mainland than any other bank, was the most heavily traded stock in Hong Kong on Wednesday, with turnover reaching HK$4.615 billion and trading volume of 969 million shares.

Li Guohua, chairman of Postal Savings Bank, acknowledged that Wednesday’s trading debut had failed to advance much above the offer price, but still described the event as a success.

Postal Savings Bank shares open unchanged, hovering near HK$4.76 offer price in first hour of trade

“I think the market response has been quite collective because looking at today’s stock price being sustained at HK$4.76 to HK$4.77, I believe that it is pretty ideal,” he said. “The bank’s IPO this time mainly relied on ordinary capital.”

Postal Bank’s IPO, which raised HK$56.63 billion (US$7.3 billion), was offered at the lower end of a price range, amid concern that the bank was overvalued compared to bigger competitors like Bank of China, at a time when the economy was growing at its slowest pace in decades.

Market watchers said the valuation of the bank was still on the high side among Hong Kong-listed mainland banks.

“The shares are being offered at 20 to 33 per cent premium on a price-to-book basis and a 42 to 57 per cent premium on price-earnings ratio to comps,” said Sumeet Singh, an analyst at Smartkarma, an independent research website.

First Shanghai Securities’ chief strategist Linus Yip Sheung-chi, however, said offering the stock at the low end of the price range “has left some space for a slight increase after listing, but it’ll be hard to predict after the lock-up period expires.”

Postal Bank sold 77 per cent of its stock offer to six cornerstone investors, who together bought US$5.7 billion of the shares to offset a lukewarm response by global and local investors.

In return for early and guaranteed allocations to the shares, cornerstone investors are committed to a six-month moratorium on selling the stock, according to term sheets.

“High cornerstone coverage hasn’t been great for post-listing performance,” said Singh. “This deal is unlikely to be an exception.”

The Beijing-based bank operates more branches than any other lender in the country, with 8,301 of its own outlets, while 31,756 are agencies run by the postal service dotted across China from Lhasa in Tibet to Beijing and extending deep into rural areas.

But big isn’t necessarily beautiful. Postal Savings Bank’s return on assets is about half that of its competitors, because the bank must pay China Post Group to help run its branches, “resulting in lower non-interest income, and higher cost-to-income ratio,” said Singh.

Li, however, believes it’s the bank’s expansive business of more than 40,000 branches that differentiates it from others. Its future development depends on maintaining big-scale banking services, servicing rural and urban areas, and working with small enterprise, he said.

“This way the bank can best use our resources and support economic development and remedy the problems in rural financial services,” said Li. “Our market coverage rate is 2.6 times. I believe that this is a very ideal rate for recent times.”

Postal Bank’s listing elevated Hong Kong into the No 1 spot globally for IPOs in the first nine months of this year.

The total amount raised was lower than the expected US$8.1 billion as the IPO was only 1.6 times oversubscribed.

The 2014 debut listing in New York by Alibaba Group, owner of the South China Morning Post, remains the largest and most successful IPO of all time. Its shares opened with a 36 per cent premium and finished the first day 38.07 per cent higher.

Additional reporting by Jennifer Li