And the award goes to...a Chinese financial IPO

Bank of China (Hong Kong)'s Hong Kong listing in 2002 opened the door for China Life Insurance and China Construction Bank to follow suit. The three lenders were awarded our Deal of the Year in 2002, 2003 and 2007.

Ten years ago, few people would have been prepared to bet that China's financial institutions would sail through the equity markets. The names of top banks were often associated with bad debts and scandals, and most lenders had little clue about how to spot dodgy borrowers.

Taking the firms to the public markets was an extremely onerous task. However, Beijing showed an iron commitment to bank reform and was prepared to wipe the slate clean of the banks' past mistakes in order to make them fit for listing. That effort proved rewarding, with most major financial institutions having obtained stock market listings over the past decade and gained considerable status in the industry worldwide. China's top publicly traded banks have grown phenomenally quickly and are now big by all measures, except their bosses' pay-cheques.

As FinanceAsia.com celebrates its 10th birthday and the market is expecting yet another massive share sale by a Chinese lender -- Agricultural Bank of China -- it's worthwhile to look back on the significant Chinese bank deals that have topped the deal book in some of those years.

The initial public offerings of Bank of China (Hong Kong), China Life Insurance and China Construction Bank (CCB) were all singled out as the Deal of the Year in the particular year when they occurred. And so was the biggest of them all -- Industrial Bank of China's dual listing in 2006, which we covered in a separate story earlier this week. (Bank of China was unlucky in that it went public in the same year as ICBC, and thus never made it beyond the shortlist.)

And indeed, there's plenty of evidence suggesting that these deals deserved their crowns.  

Bank of China (Hong Kong)'s merger and restructuring of 13 affiliate financial institutions of its parent group in Hong Kong in 2002 heralded a new chapter in the country's privatisation process as the government turned its attention to the arduous, but critical task overhauling its domestic banking system.

The deal, which was brought to the market by BOC International, Goldman Sachs, Nomura and UBS Warburg, was also ranked by FinanceAsia as the best privatisation that year.

The lender's $2.67 billion IPO was the first international stock listing by a mainland bank in Hong Kong. The entire transaction may not seem that special in retrospect, but the success of the deal was like a thriving island surrounded by a sea of problems.

The IPO came in a year when institutional investors fine-tuned their analysis of China's more challenging privatisations, and considerable skills were required to enable Bank of China (Hong Kong) to price a deal towards the top end of its indicative range and at a premium to Hong Kong's domestic banking sector.

The task was not helped by a rash of scandals at the bank towards the end of 2001, the subsequent cancellation of a planned New York listing and a sluggish economic backdrop in Hong Kong, where local banks were engaged in a fierce price war. 

Worse still, general market conditions were extremely volatile, with the Dow Jones index falling to its lowest point in four years over the course of the two-week bookbuilding. The IPO appeared to have little in its favour except for the strategy of the deal management group, which allowed the offering to amass $19 billion worth of orders from enthusiastic investors. The transaction was recognised by the FinanceAsia editors at the time as the defining deal of 2002, both because of the massive amount of M&A restructuring work that had gone into the creation of the new Bank of China (Hong Kong), and also because the success of the IPO itself.

Unfortunately, the triumphant listing couldn't douse off the flame of scandals, which continued to plage the bank for years. Problems resurfaced at the bank in 2003, the year following its listing, and the bank's then chief executive, Liu Jinbao, was later arrested for embezzlement.

Nevertheless, the China growth story only became more seductive in 2003. This helped China Life to accumulate $80 billion worth of demand for its $3.021 billion Hong Kong IPO in November of that year, even though many had assumed the giant life insurer would be an extremely hard sell given the sector's unprofitable track record and primitive risk controls.

In the end, the fundamentals didn't seem to really matter. One thousand institutional investors applyed for China Life shares and the staggering size of the order book represented the equivalent of two full months of trading on the Hong Kong stock exchange.

In addition to Deal of the Year, China Life's IPO was also awared Best Equity Deal, Best IPO and Best Privatisation. It was arranged by China International Capital Corp (CICC), Citigroup, Credit Suisse First Boston and Deutsche Bank.

Both of those deals were dwarfed by the listing of China Construction Bank (CCB) in 2005. The deal marked a staggering transformation for the bank and for the country's financial industry, not only because it raised $8 billion from the sale of a 12% stake -- the largest Hong Kong IPO in five years -- but also because the bank was technically insolvent less than two years ahead of its listing. Its then chairman Zhang Enzhao was arrested for bribery just eight months before the sale, while Zhang's predecessor was charged with bribery and arrested in 2003.

While there was no discernible track record by which to gauge its future performance, investors showed remarkable faith in CCB. With a book value of 1.96 times, CCB listed at a premium to just about every major bank in Asia. 

The halo effect of Bank of Communications' popular $1.9 billion share sale few months earlier in the same year certainly helped CCB get over some of its hurdles. More importantly, Bank of America's $3 billion investment for a 9% stake also helped seal the investor confidence. Investors were not only comforted by the size of the investment, but also by the fact that Bank of America placed 50 of its staff in key areas within CCB.

The deal was awarded as the best equity deal, best IPO and best privatisation in 2005. CICC, Credit Suisse First Boston and Morgan Stanley were the lead managers.

If you are interested in re-reading some of our coverage at the time, you can take a look at:

- China Construction Bank rolls out IPO

- CCB provides new pricing paradigm for Chinese banks

- Mystery of CCB scandal

- Bank of China pre-markets IPO  

Will NPLs haunt Bank of China HK and a future US listing?

 

¬ Haymarket Media Limited. All rights reserved.

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