BoCom readies investment banking spinoff

China’s fifth-largest bank has started gauging investor demand for an IPO of its offshore securities brokerage and investment banking arm, BoCom International Holdings.

Bank of Communications (BoCom), China’s fifth-largest lender by assets, has started sounding out investors for a $200 million initial public offering of its offshore securities brokerage and investment banking business.

Wu Wei, chief financial officer of the Shanghai-headquartered bank, has said the listing of BoCom International Holdings forms part of its strategy to establish an independent offshore banking franchise for the bank and stressed that raising new funds is not a priority.

The proposed IPO, which BoCom began pushing on Thursday, will nonetheless provide BoCom International with fresh capital to expand in Hong Kong, where competition in the brokerage market is intense after other mainland Chinese houses expanded offshore, largely driven by Beijing’s ambition to integrate Hong Kong’s stock market with those in Shanghai and Shenzhen.

Demand for securities brokerage services has grown hugely in Hong Kong since the launch in November 2014 of a stock trading link between the city and Shanghai, and subsequently, in December 2016, with Shenzhen. The business has become highly capital intensive as demand for margin financing and stock lending has grown, particularly in the wake of the stock exchange links with China -- one of the most leveraged stock markets in the world.

Investment banking too has turned more capital intensive because banks have a higher chance of winning business with stronger underwriting capabilities. In addition, Chinese institutional investors have increasingly borrowed from stock brokers after China tightened capital controls last year.

One source familiar with the situation said BoCom International is better positioned to list than some of its peers because its operations are already highly independent. That is in contrast to the offshore businesses of some state-owned banks, which rely on their parents’ vast corporate banking and deposit networks to source deals.

Market value

Potentially the first offshore investment bank spun off by a state-owned bank, BoCom International’s IPO will offer some clues as to how this kind of Chinese business should be valued in international markets.

Since broking and investment banking earnings tend to be highly volatile, it is not easy to assess a fair value. In particular, the performance of the brokerage business depends on stock market liquidity and overall trading volumes, while that of the investment banking business depends on corporate deal flows in capital markets.

BoCom International itself has experienced sharp ups and downs. Total revenue surged 101% to HK$691 million ($89 million) in 2015 before plunging 30% to $62.5 million last year. Overall profit has been on the rise, though, from $3 million in 2014 to $45 million in 2016.

Analysts believe the company will likely be benchmarked against the already-listed, offshore units of mainland Chinese brokerage firms such as Haitong Securities and Guotai Junan Securities. That said, the two firms are currently valued quite differently by the stock market, with Guotai Junan International trading at a 54% premium to its book value compared with Haitong International's premium of just 1%.

According to the terms of the deal, BoCom shareholders will be able to subscribe for one BoCom International share for every 500 H-shares held.

Joint sponsors of the IPO are BoCom International, CICC, Haitong International, and China Securities International.

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