The Strategist

Chinese bank finished IPO of the year

09/21/2016 - 13:25

Today, Postal Savings Bank of China (PSBC) raised about $ 7.4 billion during its IPO. Trading with PSBC shares should start on the Hong Kong Stock Exchange on 28 September. Initially, the bank planned to raise up to $ 8.1 billion, but investors considered the price too high. Nevertheless, this is the largest IPO in the world over the past two years.

Postal Savings Bank of China Ltd. (PSBC), sixth in terms of assets in the country, on Wednesday raised more than $ 7 billion in an initial public offering, writes The Wall Street Journal, citing sources. 

The sum raised during the IPO is second only to the Chinese online retailer Alibaba Group, which received from investors around $ 25 billion in 2014. Financial intermediaries of the IPO were Bank of America Merrill Lynch, China International Capital Corp., Goldman Sachs, JPMorgan and Morgan Stanley.

PSBC sold its shares at a price of 4.76 Hong Kong dollars ($ 0.61), which is closer to the lower boundary of previously announced placement range of 4,68-5,18 dollars, sources said.

According to Dealogic, IPOs of Hong Kong companies raised $ 9.5 billion from the beginning of the year, compared with $ 7.5 billion in Shanghai and $ 6.9 billion in New York on the NYSE.

PSBC was established in 2007 on the basis of postal savings banks. It has the biggest branch network in China (40 000 offices), which serve 505 million customers, which is more than population of the United States and Russia altogether. Postal Savings is the only Chinese bank that works in remote agricultural areas mostly populated by farmers and small entrepreneurs. Increasing competition from online lending companies makes such small offices profitable and, generally, obsolete. Another risk of the bank is need to finance public projects, even if they do not generate revenue.

In December 2015, PSBC sold nearly 17% stake of its shares to a group of foreign investors, who then evaluated the bank at $ 41 billion.

It is noteworthy that the placement took place during a 60-percent drop in business activity in the Asian equity capital market. Most of surveyed experts agree that such a large IPO held in the region could somewhat revive the IPO market in general. Other Chinese brokerage companies, such as China Securites Co., Everbright Securites Co. and etc., are The fact that also considering IPO on the Hong Kong Stock Exchange.

It would be wrong to represent PSBC as some financial startup, notes The Economist. Nine years ago, it was established on the basis of a postal service unit, which had been something like a bank for two decades before. Once, the country’s government decided to equip post offices with special windows to provide rural areas with accessible financial services. Many countries have done so at different times.

Many residents of remote Chinese villages see PSBC as the only financial institution trustworthy enough to keep their savings in. The organization also gives tens of millions of former country people migrated in city areas an opportunity to send money home. At the end of this March, PSBC had 40 thousand units in 98.9% of Chinese townships. The bank serves 505 million retail customers, or about one out of every three residents of China.

Until now, PSBC has essentially been a place to store money. It devolved almost all deposits to the central bank, and earned a penny profit. Perhaps that is why, PSBC did not praise their achievements speaking of the IPO. Instead, as noted by The Economist, tis management focused on the scale and huge unrealized potential.

The Chinese government's decision to detach as PSBC a separate company in 2007, giving the right to increase volume of lending, was the authorities’ first attempt to improve its performance. However, revenue earned on the loans amounted to only 0.51% of the total volume in 2015. This was more than twice lower than average result of Chinese banks, fixed at 1.1%.

Corporate governance of PSBC was not up to par either. Tao Liming, head of the bank since its separation into an independent company, was convicted of corruption in 2012. This year, he died in prison.

However, large investors are convinced that PSBC can be transformed. The Economist sees every opportunity for growth in PSBC. Now, ratio of loans and deposits on its balance sheet is 39%, which is 30 percentage points lower than that of other Chinese banks. A huge proportion of its assets still falls on public bonds with low returns. In addition, PSBC has yet to take advantage of its huge customer base and start to sell other products, for example, insurance services.

In all cases, the process of becoming a full-fledged retail bank is going to be quite difficult. It seems that low yield is inherent to postal banks, notes The Economist. One of experts on the Chinese banking sector told the publication that PSBC has an obligation to provide financial services in rural areas. He simply cannot close unprofitable offices.


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