HONG KONG - Banking behemoth Agricultural Bank of China (ABC), whose customer base outnumbers the entire population of the United States, defied gravity on Thursday when its shares gained on their first day of trading in Shanghai while other stocks declined, setting the stage for what may be the world's biggest initial public offering.
By Olivia Chung
The bank, which has 350 million customers and 23,000 branches yet first appointed a board of directors as recently as 2009, initially priced its shares at 2.68 yuan. They gained more than 2% in early Shanghai trading before closing up 0.8% at 2.70 yuan. The Shanghai Composite Index dropped 1.87%.
Attention now turns to Hong Kong, where the bank's stock starts trading on Friday and where new listings have performed poorly this year amid bearish market sentiment.
ABC, China's third-largest lender after Bank of China and Industrial and Commercial Bank of China, raised about US$19 billion in the run-up to its dual listing. It has an option to expand the share sale by 15%, which if exercised would raise a total of US$22.1 billion, surpassing the US$21.9 billion world record ICBC raised in 2006.
Agricultural Bank this week announced a 40% increase in first-half profit to 46 billion yuan (US$6.8 billion), giving incentive to retail investors who missed out on the pre-listing share sale to buy the stock on its first day of trading. Fee-based income surged 60% in the six months to June while new lending grew 11.2%.
"The niche of the ABC offering is the big rural concept," said Dennis Lo, senior commentator of ETnet, a Hong Kong-based financial data service provider. "Given that the government has subsidized household electric appliances and vehicle sales in rural areas since early 2008 and helped farmers to earn more income ... this should help improve ABC's asset quality.
"The lender has the potential for higher profits in the coming years," Lo said.
Yi Zhang, vice president and senior analyst of Moody's Investors Service, also saw the growth potential of China's rural areas, where ABC in 2008 had a leading 21.6% market share of deposits.
"ABC is uniquely positioned to benefit from China's efforts to urbanize the country and increase the income level of the rural population," said Yi before this week's listings. However, the bank "has yet to formulate and execute effective strategies" to make the most of the trend towards higher rural incomes.
At the same time, rivals such as China Construction Bank "are reportedly very close to getting regulatory approval to set up rural bank holding companies". These are expected to grow quickly by first targeting large and high-end customers, said Yi, so that "ABC’s comparative advantage could quickly erode if it cannot differentiate itself".
Lo also highlighted ABC's "weak" corporate governance, risk management, and internal controls, although he attributed that in part to its former management structure. "We expect accountability and transparency to increase following the IPO, similar to the experiences of other state-owned big banks."
Demand for ABC's IPO shares was strengthened by almost 30 "cornerstone" investors, from China Life Insurance to Qatar's sovereign wealth fund, which are required to hold the stock for at least 12 months. Their reasons for supporting the share sale are political as well as financial, with big mainland investors under government influence and overseas buyers keenly aware of how much Beijing wanted the sale to be successful. ABC set aside a bigger portion of the IPO to cornerstone investors than any other major Chinese bank to help support the offering, Bloomberg reported.
Their commitment to the stock comes despite concerns that the bank, with a history of bailouts to reduce its burden of non-performing loans and having high lending growth, may soon have to return to the market for more funds, as its rivals have done.
ABC's non-performing loans were as high as 819 billion yuan, for a bad-loan ratio of 23.5%, at the end of 2007. The government, which has struggled to get the bank into shape for a stock-exchange listing, stepped in with a US$19 billion cash injection and hived off 800 billion yuan of non-performing loans at the end of 2008. Such loans are now 120.2 billion yuan, or 2.91% of its total loan book, according to the bank's prospectus.
Dual-listed Bank of China, which had planned to raise funds this year by selling 60 billion yuan of shares in Hong Kong, has switched instead to a rights issue in Hong Kong and Shanghai. ICBC plans to issue 25 billion yuan of convertible bonds by September, and China Construction Bank (CCB) last week obtained shareholder approval to raise up to 75 billion yuan through a share rights offer.
"Among the seven listed mainland banks in Hong Kong, I would rather buy ICBC or CCB, as they have better profitability and better operations," said Lo. "In terms of loan quality, profitability, return on equity, operational efficiency and asset quality, ABC has lagged behind the three other state-run banks" - ICBC, Bank of China and CCB.
Short-term retail investors have other factors to consider, particularly the weak state of stock markets, with the benchmark Shanghai Composite Index down 26% this year. The decline in the Hong Kong market has been less severe, with the blue-chip Hang Seng Index down about 8% in the year to date, but the city's retail interest in ABC is not as enthusiastic as in Shanghai.
"I haven't bought any new listings recently due to the sluggish stock markets in China and Hong Kong," said Elaine Chow, a retail investor who has years of experience in subscribing to new shares, before the Shanghai listing debut. "ABC is definitely not my choice now and I don't think I can make a quick buck from its new shares."
New listings in Hong Kong have suffered this year as doubts remain about the direction of the global financial crisis. Last week, shares in battery maker Chaowei Power declined 9% and shares of Sinoref, which makes products for the steel industry, dropped almost 7% below their offer prices.
Russian oligarch Oleg Deripaska's Strikeforce Mining & Resources, which reportedly planned to raise US$200 million in Hong Kong, and wind power turbine maker Xinjiang Goldwind Science and Technology, eyeing an HK$9.09 billion (US$1.17 billion) IPO, have both had a change of heart. Shenzhen-based Shirble Department Stores, which operates 11 department stores in southern China, last month became the sixth company this year to shelve plans to list in Hong Kong, citing the "deterioration in market conditions".
Of the 14 big cap listings on the mainland market so far this year, about 10 have fallen below their IPO price, according to Wind Info, a Shanghai-based service provider of financial data.
The retail part of ABC's sale in the mainland was 10 times oversubscribed, while the retail tranche of the HK$81 billion worth of shares sold in Hong Kong was 4.9 times oversubscribed. That compares with the 76 times oversubscription, and HK$411.4 billion worth of orders, for the retail part of ICBC's H-share offering in 2006.
Olivia Chung is a senior Asia Times Online reporter.
(Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
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