Bank of Zhengzhou tests demand for IPO

After two city commercial bank listings already in the last fortnight, it remains to be seen how much demand is left in the market for such assets.

Bank of Zhengzhou started a three-day period of pre-marketing for its initial public offering on Monday with a view to getting the deal done before the end of the year.

The Chinese city commercial lender, the third one vying to come to market in recent weeks, is looking to sell 1.32 billion shares, or 25.67% of its enlarged share capital, including a 9% stake held by the National Social Security Fund, bankers familiar with the situation said.

Bookrunners will have to tread gingerly in soliciting investor feedback following the successful IPOs of Bank of Qingdao and Bank of Jinzhou, which may have already sucked up a big portion of investor demand for city commercial banks.

Shandong-based Bank of Qingdao was the first out of the gate when it completed a $607 million offering in late November. A week later larger rival Bank of Jinzhou raised $794 million.

Adding to the challenge facing bookrunners on the Bank of Zhengzhou deal is the fact that many investors are often reluctant to put their money into work as the year winds down.

“Funds that have already outperformed the market, which remained largely unchanged from the beginning of the year, are likely to stay away from new investment this year,” a Hong Kong-based equity capital markets banker said. “This is unlike last year when many investors were still eager to invest near year-end in order to recover the wider market losses in the final few weeks of the year.”

Bank of Zhengzhou could include a large cornerstone tranche to counter the risk of sub-par public demand, although bankers familiar with the situation said the lender is yet to finalise its deal structure and details.

But investors may well prefer transactions with minimal cornerstone involvement because they are normally easier to trade due to higher levels of liquidity in the secondary market.

The recent IPO examples of Bank of Qingdao and Bank of Jinzhou are instructive.

The total value of Bank of Qingdao shares changing hands on Monday was about HK$7.4 million ($953,529), or 0.03% of the company's US$2.46 billion total market value. The low turnover is partly attributable to the fact that 72% of the shares sold in the IPO were allocated to six cornerstone investors, which cannot trade their shares for six months.

In contrast, Bank of Jinzhou had a much smaller cornerstone IPO tranche of 15%. The trading volume of its shares on Monday was $27 million, equating to 0.8% of its $3.29 billion market capitalisation.

However, a higher float does not guarantee a more stable secondary market performance.

Bank of Qingdao shares hovered around its IPO price of HK$4.75 on Monday. Meanwhile, Bank of Jinzhou saw its shares plunge by 8.5% to as low as HK$4.26 by midday, before recovering all of the losses to close up 9.4% at HK$5.10 in an extremely volatile market debut.

Shift in strategy

Bank of Zhengzhou is the second-largest bank by assets in central China’s Henan province, the fifth-largest provincial economy with a total GDP last year of $569 billion. But the fact it is also the third-most populated province in China means it has a relatively low per capita GDP compared with wealthier coastal provinces.

Similar to other city commercial banks, the Zhengzhou-based lender generates revenue primarily from its corporate banking business. Last year, operating income from corporate banking business grew by 12.1% to Rmb2.8 billion ($437 million) and accounted for 20.9% of the bank’s total revenue.

In recent years it has focused on developing its treasury business, which includes wealth management for its corporate clients. In the first six month of the year, the business grew 1.33 times to $237 million from a year earlier and contributed 39.5% of the bank’s revenue.

Syndicate analysts predict that the bank’s bottom-line growth will slow in the next two years because of rising credit costs. So the bank is expected to continue to shrink its credit-sensitive corporate banking business and expand its treasury business.

That is a logical shift of focus considering that the corporate banking environment is set to get tougher with the arrival of Zhongyuan Bank, a newly-established commercial bank in Henan province.

Rising competitor

Zhongyuan Bank was set up a year ago through the merger of 13 city commercial banks. That has created the province’s largest bank with total assets of Rmb209 billion, 2.5% larger than Bank of Zhengzhou's as of the end of last year.

After the merger, Zhongyuan Bank will be one of five city commercial banks in Henan province alongside Bank of Zhengzhou, Bank of Luoyang, Pingdingshan Bank, and Jiaozuo Bank.

Both Bank of Qingdao and Bank of Jinzhou priced their IPOs near their respective book values as of the end of last year. Should Bank of Zhengzhou follow suit it would have an implied market cap of $1.95 billion, the smallest of the three.

Bank of Zhengzhou is scheduled to conduct management roadshows and collect institutional orders between December 10 and December 16. Pricing is slated for December 16 before listing on December 23.

Citic CLSA and BOCOM International are joint sponsors of the IPO. They are also joint bookrunners together with CCB International, CICC, Guotai Junan, Haitong Securities, ABC International, and Central China Securities.

¬ Haymarket Media Limited. All rights reserved.
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