Bank of China, CCB vie for first listing

Which of the two state-owned banks will come first?

With two foreign auditors already hired, a fierce competition is bubbling between Bank of China and China Construction Bank to achieve an overseas listing, say Chinese bankers and media reports, but a listing, domestic or international, is not likely before 2005.

It is on the record that in 2002, the new CCCB president, Zhang Enzhou, announced his determination to be the first listed state-owned bank. Bank of China, then under Liu Mingkang, was not keen to be bested, but NPL levels left the bank with no option but to accept a listing date of 2005 compared to a preliminary date of 2004 for CCB.

"CCB's advantage is that it's smaller and its house can be more easily put in order," estimates Wei Yan, a Chinese banking expert at Moodys in Hong Kong.

In addition, the government could be tilting towards giving a new bank a chance at raising fresh capital, since Bank of China listed its Hong Kong assets separately last year, he adds

Stock exchange profitability requirements have been helped by a reduction of the unpopular top line revenue tax, to be paid on top of the corporate tax rate of 33%. The rate has gone down by 5% per year for the past two years.

To September this year, Bank of China and China Construction bank, the two lead contenders for a listing, saw their net profits rise to Rmb 38.9 billion and Rmb 37.7 billion respectively. Under the recent, and much stricter, international five category classification system, CCB's NPL level stands at 11.92%, down 4% on last year, while BOC's hovers around 18%, although it is expected to go down below 15% next year.

The successful listing candidate will beef up his capital and have stripped out the worst assets upon a successful listing.

Since banks are valued at their net asset value, it is likely the government will supply extra capital to the banks to help them write down their non-performing loans. That raises their net asset value and boosts the amount they can raise.

A listing, with its financial and corporate governance benefits, should provide a valuable head start in the race to make banks competitive before the market is thrown open under WTO organization rules.

But the banks have a long way to go. They must audit their thousands of branches, classify their bad loans according to the five category system, and transform themselves into shareholding companies.

To help them in these task, CCB hired KPMG last year, while BOC hired PWC at almost the same time.

Despite being likely retained till the listing, KPMG is apparently not as yet looking at the politically sensitive issue of a listing or incorporation.

Instead, KPMG is carrying out an audit of the bank's loan assets in the past three years and classifying them according to the international five-category system, as well as rewriting balance sheets to international standards.

Currently, the company, which is reportedly receiving Rmb 200 million in fees, is working on the Beijing branch network and will later spread out to the relatively small northwest region branch network.

PWC, on the other hand, is examine the regions where BOC's best and largest assets are concentrated: Beijing, Liaoning and the coastal areas.

Bank of China could still be first, it is rumoured, due to the problems China Construction Bank is having in coming up with the right listing proposal.

In February this year, CCB sent a proposal to the state council suggesting the incorporation of 38 domestic and all the five foreign branches, being the best assets stripped out of the old company. The plan was reportedly to issue H-shares in Hong Kong before doing an A-share issue in China, and to end up serving the Hong Kong market as well as the mainland market.

In September, after being advised to continue to research its listings plans, the bank came up with the notion of incorporating its assets in the Yangtze River delta, around Shanghai. This is one of the richest areas in China. The next step would be a foreign listing. That, reportedly, is because CCB, is extremely suspicious of the domestic market: The A-share market has been dropping in spectacular fashion for a large part of the year.

However, this was also rejected, and the latest plan is for CCB to revert to its old plan of parcelling up the 38 domestic and fiver foreign branches and to list 20% of its shares only on the A-share market, not in 2004 as initially planned, but in 2005. Next, the bank would continue to focus on reducing its NPLs, and when the conditions were right, to list in Hong Kong, Singapore and the US.

One banker dismissed the numerous rewrites as evidence CCB is lagging BOC.

"The people in Beijing don't really understand many parts of the listing process. It's perfectly normal for listings proposals to be rewritten many times," he said.

He also said that given CCB's relationship with Morgan Stanley, via the joint venture investment bank CICC, the bank has a great advantage in terms of the expert advice it could draw on.