Bank of Communications is considering spinning off its investment banking business in a Hong Kong listing, an unprecedented move that could inspire other state-owned banks if it turns out to be a success, according to sources familiar with the situation.
The move would make Bank of Communications the first of China's state-owned banks to spinoff an investment banking arm in a separate listing. But it could take some time before the deal hits the market.
Industrial Securities, a privately-owned Chinese securities firm, is preparing a Hong Kong listing of its own offshore brokerage arm. But although that deal is expected to close by the end of this year, BoCom's has a maze of approvals to navigate.
The bank will need to get approvals from its investors in Hong Kong and Shanghai, where it is already listed, said a person familiar with the matter. But any spinoff will also require approvals from the State-owned Assets Supervision and Administration Commission and the China Banking Regulatory Commission.
The idea of listing BoCom International is being mooted at a time when Chinese banks are increasingly seeking ways of strengthening their balance sheets in order to fulfill regulatory requirements on capital adequacy. But that does not appear to be the driving force.
Bank of Communications, a major state-owned lender, is subject to a tier-1 capital ratio requirement of 9.5% because of its strategic importance to the country’s financial system. (Smaller banks, in contrast, are required to maintain a minimum tier-1 capital ratio of 8.5%.) But the bank is safely above that minimum. Its tier-1 capital ratio stood at 11.39% at the end of the first quarter.
The plan is being considered for other reasons, said a person familiar with the matter. BoCom International's spinoff — which is now going through a feasibility study — is intended to establish an independent platform for the investment banking business, allowing it to raise funds to support its own development.
And indeed, the spinoff could have done little to help strengthen the bank’s capital base given that the estimated proceeds of $150 million from the spinoff is only about 0.1% of the lender’s total assets of $138 billion as of the end of last year.
BoCom International was set up in 2007 with a registered capital of HK$2 billion ($258 million). It remains Bank of Communications’ sole investment banking platform. The firm engages in capital market financing, mergers and acquisitions advisory and financial consulting, according to an annual report.
The Hong Kong-headquartered subsidiary is also the bank’s sole securities brokerage platform because Chinese banks are not allowed to directly engage in sales and trading of securities under local regulations.
BoCom International also owns an asset management arm known as BoCom International Asset Management, which has recently invested in EC World Reit’s $280 million IPO in Singapore.
BoCom International reported total revenue of $149 million and $45 million in net profit at the end of 2015, according to the bank’s annual report. The firm employed 261 employees at that point.