Bank of China $9.7B IPO Lures Investors

Posted 26 May 2006 @ 10:14 pm EET     Print     Reprint     E-Mail     Comments

SHANGHAI, China (AP) - Bank of China's $9.7 billion initial public offering, the latest in Beijing's parade of attractions, has drawn keen interest among stock market investors hoping to buy into China's rip-roaring growth despite the risks.

The IPO, the world's biggest in six years, brings to the international market China's second largest and its oldest bank, and one that like its peers is still contending with a legacy of lending scandals and bad debts.

With shares representing a 10.5 percent stake in the company priced at 2.95 Hong Kong dollars (38 cents) each, Bank of China has an initial market capitalization of about 750 billion Hong Kong dollars ($96 billion).

That ranks between Germany's Deutsche Bank AG and Switzerland's UBS AG but well behind the U.S. banking companies Citigroup Inc. and Bank of America Corp.

The bank's shares begin trading June 1 in Hong Kong. So far, response has been enthusiastic despite recent declines in Hong Kong's benchmark Hang Seng Index. There were more offers to buy shares than shares available and the IPO has attracted strong support from major international investors such as Hong Kong tycoon Li Ka-shing's Cheung Kong Holdings, Japan's Bank of Tokyo-Mitsubishi UFJ Ltd. and Saudi Prince Alwaleed's company Al Azizia Commercial Investment Co.

Long lines formed on Hong Kong sidewalks after the bank began offering local investors 1.28 billion shares in the IPO.

Founded in 1912, Bank of China is the country's most international lender, with branches in 25 countries. Its Hong Kong unit, BOC Hong Kong (Holdings) issues currency in the territory and contributes nearly a quarter of the parent bank's profit.

The bank's 4.7 trillion yuan ($586 billion) in assets makes it China's second biggest after the Industrial and Commercial Bank of China, which plans an IPO later this year. ICBC has assets worth more than 6 trillion yuan ($750 billion).

Its balance sheet is relatively clean following a restructuring and a $22.5 billion government bailout. But it has yet to prove it will be able to keep problem loans at bay, given its history of lending scandals, says Wei Yen, China banking analyst at Moody's Investors Service.

"The bank has been cleaned up, but nothing has given us confidence that they can maintain their asset quality," he says. "Right now, we are in a wait and see position."

Bank of China's ratio of nonperforming loans to total lending is reported at 4.4 percent in mid-2005, down from more than 33 percent in 2003, though the China Banking Regulatory Commission and other industry experts, have warned repeatedly that all lenders risk a rebound in bad debt if they don't improve controls over branch management _ where most of the problems occur.

Bank of China's former chairman and president, Wang Xuebing, is serving a 12-year prison term for taking bribes. Liu Jinbao, a former president of the bank's Hong Kong branch, was given a suspended death sentence last August for embezzlement _ such sentences are usually commuted to life in prison.

Two former branch managers and their family members are facing trial in Las Vegas, Nev., for alleged embezzlement and money laundering.

The bank, and China's banking regulators, have vowed to improve risk controls and management to prevent further scandals.

Improvements brought about by the government's bailout are "offset by undertested risk management systems, modest profitability and capitalization and the bank's mediocre control over its branches," ratings agency Standard & Poor's said in a recent report.

As part of its effort to bring in outside expertise and reassure investors, Bank of China has sold stakes worth a total of $5.1 billion to UBS, Singapore's Temasek Holdings and a consortium led by the Royal Bank of Scotland Group PLC.

It also recruited a veteran banker in March 2005 from London-based HSBC Corp., Lonnie Dounn, to serve as its credit officer _ a pioneering move for a state financial institution but one that appears to have faltered.

The Beijing-based bank announced in its IPO prospectus that Dounn has resigned and is due to leave in September. It did not say why he was leaving or who would replace him.

While allowing the banks to sell billions of dollars worth of equity to foreign banks and other institutional investors, Beijing has stressed its determination to maintain state control over the strategically important industry, limiting the foreigners' say in management.

Bank of China is selling only 10.5 percent of its equity, and even if it exercises an option to sell another 3.84 billion shares, raising the IPO's proceeds to $11.2 billion, it will be listing only 11.9 percent of its total capital.

As of now, the $9.7 billion offering is the world's biggest since a $10.6 billion IPO by AT&T Wireless Services Inc. in April 2000. It would be the biggest IPO ever for China.

The Chinese banks are dwarfed by international competitors such as Bank of Tokyo-Mitsubishi UFJ Ltd., which holds assets worth about 190 trillion Japanese yen ($1.6 trillion) and Citigroup with $1.55 trillion in assets.

But investors are attracted less by the size of the banks than the allure of China's economy, which has been expanding at a rate of about 10 percent for several years _ and the performance of other banks' shares, analysts say.

China Construction Bank Corp., the country's third-biggest lender, has seen its share price rise about 50 percent since its $9.2 billion IPO in October. Shanghai-based Bank of Communications Co.'s share price has more than doubled.

"Some people were holding out, they were not convinced by the story, but then they were kicking themselves after the stock price" for other banks rose, said Wei of Moody's in Hong Kong. "So now there's a speculative effect where investors are being egged on to invest by others."