Bank of Communications seeks $1.9b in IPO
(bloomberg)
Updated: 2005-06-05 16:52

Bank of Communications Ltd., China's fifth-largest lender, plans to raise as much as HK$14.9 billion ($1.9 billion) in the first of three overseas share sales by the nation's banks this year, the bank's sale document said.

The Shanghai-based lender will offer 5.856 billion shares, or 13 percent of itself, for HK$1.95 to HK$2.55 each in an initial public offering, the document said. The company plans to start trading in Hong Kong on June 23 and will start marketing the sale today.

The sale will serve as a litmus test for similar initial public offerings planned by the nation's state-owned lenders to help them boost lending in the world's fastest-growing major economy. China Construction Bank, the nation's third-biggest lender, and China Minsheng Banking Corp., the first privately owned bank, plan to raise a total $6 billion in IPOs this year.

"In a rising economy, banks are poised to benefit so Bank of Communications is not going to price cheap," said Koh Choy, a fund manager at Golden Honour Assets Management Ltd. who may buy the shares. "All Chinese banks have bad loan problems, but that shouldn't be a single factor deterring investors. Good loans can become bad loans in a downturn."

Bank of Communications' price range represents 1.3 times to 1.6 times its estimated 2005 book value, bankers involved said. The range is also equivalent to 11.1 times to 14.5 times its 2005 profit, which is forecast to be at least 7.87 billion yuan ($951.4 million), or 0.18 yuan per share, the sale document said.

Banks listed in Asia outside China and Japan are trading at around 1.6 times their 2005 book value and 12.4 times their profit on average, according to Goldman Sachs Group Inc., which is arranging the sale with HSBC Holdings Plc.

Comparisons

HSBC, Europe's biggest bank by market value, is trading at an estimated 1.95 times its book value this year by Goldman. Standard Chartered Plc, a U.K.-based lender making two-thirds of its profit in Asia, is trading about 2.6 times. Kookmin Bank, South Korea's largest lender, is trading around 1.35 times, according to a research by Goldman.

Bank of Communications will fix the price of its shares on June 18, the document said. It had $138 billion of assets at the end of December, a tenth of those at Citigroup Inc., the world's biggest bank.

Hong Kong-based John Ryan at HSBC and Edward Naylor at Goldman declined to comment. Wu Wei, in charge of the sale at Bank of Communications, declined to comment.

HSBC

London-based HSBC, Europe's largest bank by market value, last year paid $1.75 billion for a 20 percent stake in Bank of Communications. HSBC bought 7.775 billion shares in the lender at 1.86 yuan each, or 1.49 times the company's 2004 book value before the investment, Goldman said in a research report. The Shanghai-based lender needs to compensate HSBC in cash or bonus shares if it offers new stock at below that price.

"The price range certainly is quite wide," said Andy Mantel at Pacific Sun Investment Management which may buy the shares. "This bank is pretty attractive with HSBC owning almost 20 percent. The deal will go quite well."

HSBC will purchase shares in the IPO to maintain its stake. HSBC can double its stake in Bank of Communication through the purchase of new shares after 2008 with regulatory approvals, Goldman said in the research.

Bank of Communications is betting the tie-up with Europe's biggest lender by market value will boost its risk management and loan quality.

Bad Loans

Bank of Communications has new non-performing loans expected to reach 1.88 percent of total lending this year, according to the Goldman research.

Bank of Communications was first set up in 1987 and was reorganized into a shareholding company in 1994. The company had $138.3 billion of assets and $6.5 billion of equity as of the end of 2004, Goldman said.

China's Ministry of Finance will own 22 percent of the Shanghai lender after the IPO. National Council for Social Security Fund will own 12.37 percent and China SAFE Investments Ltd. will have a 6.68 percent stake.

Both National Council and China SAFE Investments will convert their holdings into Hong Kong-listed H-shares and agreed not to sell their stake in the secondary market within one year after listing, the document shows.

Public shareholders will own 10.4 percent of the bank while HSBC will subscribe the IPO shares to maintain its 19.9 percent stake. HSBC also agreed not to sell its shares in the bank before 18 Aug. 2008, the share sale document said.

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