Bank of Jiangsu set for landmark IPO

The Chinese provincial commercial lender looks set to become the country's first small- to mid-sized bank in eight years to go public in Shanghai.

Bank of Jiangsu, a Chinese provincial commercial lender, looks set to become the country's first small-to-medium-sized Chinese bank in eight years to go public in Shanghai.

The Nanjing-based bank plans to issue up to 2.6 billion shares, or up to 20% of its enlarged stock capital, according to an updated preliminary prospectus filed with the Chinese regulator on Friday.

Two equity analysts and one portfolio manager told FinanceAsia the bank could raise up to more than Rmb10 billion ($1.61 billion) from the offering. That is based on the Rmb0.83 earnings per share posted by Bank of Jiangsu in 2014 (ex non recurrent income and loss deductions) and the 7.84 price-to-earnings ratio that the Chinese banking sector averages on a trailing 12 months basis, according to Wind financial database.

The initial public offering could yet surprise on the upside, given the current effervescent state of the market. A few Chinese brokers and some highly profitable Chinese companies have recently even priced at almost 23 times earnings, which is near the unspoken ceiling the Chinese regulator is thought by some bankers to impose on IPO candidates to help curb secondary market volatility.

For example, the share price for Orient Securities's IPO in March was set at a P/E ratio of 22.98 times its 2014 diluted earnings.

However, according to equity analysts the scenario for smaller city or rural banks is different.

“It’s like when you go to a wet market; you will find [that] cabbage and pork have different prices,” said a portfolio manager at a leading Chinese brokerage in Beijing. “Commercial banks mainly rely on interest rate spreads to make money, while brokers have more channels to generate profits.” As a result, broker P/E ratios can often be much higher than in the case of banks, she said.

Despite being cautious on its P/E ratio, many analysts agree that Bank of Jiangsu is likely to win regulatory approval for its Shanghai IPO application, which would make it the first A-share listing of a Chinese city or rural bank since 2007, when Bank of Beijing, Bank of Nanjing, and Bank of Ningbo all listed in Shanghai.

“The government needs such banks to raise capital to help the real economy,” the portfolio manager said. “And any financial institution will hate to miss the current stock rally for raising more money.”

The potential Bank of Jiangsu deal comes as a string of Chinese companies flock to equity markets for funding, drawn by the strong bull run in China and Hong Kong shares. As of June 15, the Shanghai Composite Index was up almost 60% year-to-date.

Last week, Guotai Junan Securities, China’s third-largest stock brokerage by assets, kicked off an IPO in Shanghai, which is likely to rank as the country’s largest flotation in five years. The broker is expected by analysts to raise up to Rmb30 billion.

Standing out from the crowd

Established in 2007, Bank of Jiangsu is seen as one of China’s best performing local commercial banks. Last year, it posted a net profit of Rmb8.7 billion – a 6.1% improvement on the 2013 financial year. In comparison, listed peers Bank of Nanjing and Bank of Ningbo each made Rmb5.6 billion, respectively.

“It has to be a very good performer to be the first to mark a good start,” a Chinese investment banker based in Beijing told FinanceAsia. “Otherwise, it will be like one drop of poison that infects the whole wine.”

Along with Bank of Jiangsu, some 10 city or rural commercial banks are queued in the pipeline, also waiting for regulatory approval. Among them is Bank of Shanghai, which plans to float 1.2 billion A-shares.

Meanwhile Huishang Bank and Harbin Bank, both listed in Hong Kong, announced last month that they too would seek a mainland listing, because of the fast pace of approval for A-share listings as well as the strong rally in China.

Bank of China International is the sponsor of Bank of Jiangsu’s listing. 

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