Bank IPOs handicapped by weak valuations

Depressed valuations in Hong Kong mean it is a big ask for banks seeking to list this year, upping the pressure on them to lean on relationships to get the deals done.
Sales pitches for Bank of Tianjin's IPO are expected to get tougher
Sales pitches for Bank of Tianjin's IPO are expected to get tougher

The investment bankers behind Chinese banks looking to list in Hong Kong expect an uphill struggle after the total market value of companies listed in Hong Kong companies fell below their net asset value for the first time in 18 years. 

The total market value of Hong Kong-listed stocks fell to 1.5% below their net asset value last Thursday, according to Bloomberg data, as capital outflows and the depreciation of renminbi weighed on investor sentiment.

Although the Hang Seng Index has since recovered nearly 800 points, shares in Hong Kong are still 4% below their forecast 2016 net asset value.

The benchmark index’s price-to-book ratio – a measure of market price relative to net asset value – was recorded at 1.03 times on Monday, the lowest point since the Asian financial crisis in 1998. The ratio reached as high as 3.5 times in early 2000 and barely touched 1.1 times during the global financial crisis of 2008.

Price-to-book ratios are a widely tracked valuation measure for banks and insurance companies alike because they provide some indication of a financial group's ability to use its capital to create value. They also reflect its underlying financial condition relative to its market price. 

Chinese banking stocks have been hit particularly hard for some time in Hong Kong, trading well below book value due to worries over slowing Chinese economic growth and rising non-performing loans. 

Industrial and Commercial Bank of China, the world’s largest lender by market capitalisation, saw its H-shares trade at 0.87 times book value at the end of last year, according to Bloomberg data. Regional lenders such as Bank of Chongqing and Huishang Bank traded even lower, at 0.74 and 0.79 times book value, respectively. 

For investment bankers and equity capital markets specialists, depressed valuations in the secondary market mean far tougher pitches when it comes to marketing new deals to investors. That is because most Chinese banks and insurance companies are not allowed by the China Banking Regulatory Commission to dispose of assets at below their last reported book value, because it is seen as selling state assets at distressed prices. 

“The rule applies to financial institutions which are majority-owned by central or regional governments,” a Chinese ECM banker told FinanceAsia. “Practically this covers almost every bank in China because the CBRC has not approved the establishment of any privately owned banks until 2014.”

China Zheshang Bank, a nationwide lender backed by the Zhejiang provincial government, is gearing up for an initial public offering to raise as much as $1 billion this year, industry sources said. Bank of Tianjin, which is majority-owned by Tianjin Port Free Trade Zone State-owned Assets Administration Bureau, has also filed for an IPO worth as much as $800 million.

“It isn’t an easy task to pitch these deals to investors because banks of much larger size are already trading at distressed prices in the secondary market, so there are a lot of choices out there,” a second ECM banker in Hong Kong said. “Because of the existing regulations, we are obliged to convince investors to invest in these new companies at a premium to those big lenders, and the premium is increasing as valuation for these big banks fall.”

Relationship deals

Given that most Chinese banks are trading at around 0.9 times book value in Hong Kong, investors interested in new bank IPOs will have to pay a premium of at least 10%.

So these companies could end up as so-called friends and families IPOs, with the majority of the shares going into the hands of an issuing bank or insurance group's business partners or to other people with close ties to the issuer, bankers and investors have told FinanceAsia.

Such relationship IPOs often attract criticism because they are seen to betray the price discovery process associated with a free market. Many of them are also suspected to be tied to loans, offers of collateral, and business contracts. 

But some bankers close to Chinese financial deals said it could be the only way to help these companies list in a bear market where public investment is less likely.

With the help of relationship investors, a number of financial institutions were able to squeeze out a few deals last year.

They include Shandong-based Bank of Qingdao, which priced a HK$4.65 billion ($607 million) flotation in November with support from other Shandong companies including Jinan Binhe New District Constructive Investment, and Rizhao Huaheng Materials Trade. Bank of Zhengzhou also completed a $656 million deal having secured investment from the likes of Zhengzhou Airport and Zhengzhou Zhengdong Construction.

Both banks listed at par to their respective book value at the time of their IPOs.

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