China city banks eye IPOs amid bad debt pile-up

China’s local commercial banks are eagerly looking for initial public offerings either in Hong Kong or mainland China to refill their coffers as bad debt increases.

China’s local commercial banks are eagerly looking for initial public offerings in either Hong Kong or mainland China to refill their coffers with fresh capital, as bad debt piles up following a period of rapid expansion.

A number of the country’s largest local commercial lenders are either queued up in the IPO pipeline or have already successfully tapped the equity market for funds like Bank of Qingdao and Bank of Jinzhou.

An estimated 10 city commercial banks are queuing in China's equity pipeline, waiting for regulatory approval from the China Securities Regulatory Commission to proceed with listings on the mainland. Among them is Bank of Shanghai, which plans to float 1.2 billion A-shares, Bank of Jiangsu, Bank of Hebei, Bank of Lanzhou.

Additionally, Hong Kong-listed Huishang Bank and Harbin Bank have also expressed their interest in gaining mainland listings too. And Bank of Zhengzhou is looking to conduct a Hong Kong IPO, perhaps as early as this month. 

They will follow a few recent bank issuers. Bank of Qingdao, the largest city commercial lender in the eastern Shandong province, raised $607 billion from a Hong Kong IPO in late November.

It was followed by Bank of Jinzhou, a local commercial lender from less-developed northeast China, which this week raised $794 million, having previously been questioned by the local regulator over its lending to troubled solar energy group Hanergy.

Both banks priced their IPOs near the bottom end of their indicative price ranges, reflecting some investor caution over the country’s banking sector as the Chinese economy slows and non-performing loans rise.

According to statistics from the China Banking Regulatory Commission, outstanding NPLs at Chinese city commercial banks surged to Rmb121.5 billion ($19 billion) as of the end of September from Rmb78.6 billion a year earlier. The average NPL ratio increased 33 basis points to 1.44% over the same period. 

According to their IPO prospectuses, the NPL ratios of Bank of Qingdao and Bank of Jinzhou at the end of June were 1.19% and 0.99%, respectively. The sector peer average at that time was 1.37%, the CBRC data showed.

China Orient Asset Management, one of China’s four biggest bad debt managers, also estimated in a November report that NPLs in China’s banking system “will continue to grow in the next four to six quarters.”

Fast growth, tighter rules

Liao Qiang, a Beijing-based senior banking analyst at Standard & Poor’s, said Chinese local city lenders are keen to go public because of the increasing capital pressure on them after years of fast growth.

“These banks’ IPO plans don’t pop up from nowhere. They were planning for it a few years ago.  Their rapid expansion was also based on possible capital replenishment through IPOs,” he told FinanceAsia.

Bank of Jiangsu was set to list on the A-share market in the summer, which would have made it the first city commercial bank to do so since 2007. Unfortunately the stock market crash put paid to its plans, while the moratorium on IPOs for four months during the year also made listing plans more difficult.  

The total assets of China’s regional city lenders reached Rmb21.2 trillion ($3.3 trillion) by the end of September, up 24% from the same period last year, according to the CBRC. By comparison, total assets at China’s big state-owned commercial banks and joint-equity commercial banks grew by 9.9% and 19.6% year-on-year, respectively.

The faster-than-peer growth of regional commercial lenders means they are in a bigger and more urgent need of new capital.

“As they have achieved the rapid expansion without proper capital replenishment they will be under growing pressure to maintain their business and meet capital adequacy requirements,” said S&P's Liao.

The Chinese banking regulator tightened its stance on capital adequacy in late 2012, raising the minimum ratio for so-called non-systematically important banks, including regional commercial lenders, from 8.5% at the end of 2013 to 9.3% by the end of this year.

Apart from enabling banks to raise equity capital directly, a public listing can also offer and facilitate alternative refinancing methods such preferred share and bond sales. The mainland securities regulator imposed a four-month ban on new listings during China’s stock market summer rout, which was only lifted early last month.


This story has been amended to reflect the fact that 10 commercial banks are waiting in the pipeline for new equity issues, and to detail Bank of Jiangsu's earlier aborted plans to list in China. 

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