Bank of Chongqing IPO price shows cautious outlook

China's Bank of Chongqing Co Ltd has priced its Hong Kong initial public offering (IPO) at HK$6.00 each, slightly below the mid-point of a marketing range, underscoring cautious investor sentiment for new listings in Asia and challenges faced by mainland lenders.

Bank of Chongqing kicks off what is expected to be a busy year for stock sales by Chinese lenders as they bolster their capital. At estimated $11 billion worth of stock sales by Chinese lenders are expected between now and the middle of next year, according to Thomson Reuters data.

"I don't think the valuation is attractive," Sun Hung Kai Financial analyst Hannah Li said. Bank of Chongqing trades at a higher forecast price-to-earnings multiple when compared to peers like Chongqing Rural Commercial Bank Ltd, she added.

Bank of Chongqing's pricing comes as another Chinese lender, Huishang Bank Corp Ltd, launched an up to $1.3 billion Hong Kong IPO earlier this week. Almost half of the offer was taken up by cornerstone investors, easing the pressure for underwriters to canvas demand from institutional and retail investors.

The Huishang IPO is expected to price on Nov 6.

The latest batch of bank earnings from China this week showed the Big Four banks were hit by thinning loan margins from rising competition, encouraging banks to diversify from their main lending business.

Bank of Chongqing, which has a whopping 32 percent return on equity, is using unique financial instruments like "trust beneficiary rights" to boost its profits..

The IPO offer price translates into a price-to-book ratio of one for Bank of Chongqing and give it a market value of $2.1 billion. Valuation of Hong Kong banks has risen since August this year on the back of takeover offers for some family-owned banks such as Chong Hing Bank Ltd.

As a result, the average forecast P/B ratio of Hong Kong bank has risen to 1.23, according to Thomson Reuters data.

Chinese banking stocks may see bearish market sentiment on concern that financial reforms may speed up interest-rate liberalization and the rise of privately-owned banks, Sun Hung Kai said in a report last week. A sharp upside in share price may hardly be seen in the short-term.

Bank of Chongqing has forecast its 2013 profit to rise at least 20 percent from a year ago to 2.31 billion yuan ($379.1 million).

The non-performing loan ratio Chinese banks have dropped 0.8 percent at the end of 2012 from 3.0 percent in 2007, while profit after tax jumped more than five times to 137 billion yuan ($22.48 billion) by the end of 2012.

Bank of Chongqing, which is set to start trading next Wednesday, is seen raising HK$4.25 billion ($548 million) after pricing the offer at HK$6.00 each. The bank offered 707.5 million shares at HK$5.60-6.50 each indicative range, Reuters previously reported.

Goldman Sachs and Morgan Stanley were hired as joint global coordinators of the Chongqing IPO, with ABC International, BoCom International, CCB International, China International Capital Corp also acting as joint bookrunners.