Everbright Bank IPO could be held up by rival offering

As its top priority, Beijing wants Agricultural Bank of China to be the first lender to tap the capital markets this year to avoid potential investor fatigue with Chinese financials, observers say.

It's been nearly two years since China Everbright Bank filed an application with the securities regulators for an initial public offering (IPO) in Shanghai, and while there is still no sign of approval from Beijing, the lender is not just biding its time. It has replenished its capital reserve via a private placement last year and is said to have managed to clear all the odds against a new share sale.

However, while there are no more technical problems blocking a listing, a new barrier has arisen that appears to be critical enough for the deal to remain on hold -- timing. The bank aims to go public by June or July this year, which would coincide with the most talked about Chinese IPO this year -- Agriculture Bank of China's (ABC) massive dual-listing in Hong Kong and Shanghai.

Beijing's top priority, observers believe, is for ABC to be the first among the Chinese lenders to tap the capital markets this year, because the fundraising plans by China's major banks is turning into a dash for cash as they muscle to take advantage of investor appetite. There are concerns, however, that the market could quickly tire of the country's needy lenders -- hence the importance of being one of the first out the gate. 

"We want to go public as soon as possible. June and July is an ideal time and we have been trying hard for that," an unidentified source involved in the China Everbright Bank deal was quoted as saying by the 21st Century Business Herald, a Chinese newspaper.

The bank is seeking to raise up to Rmb15 billion ($2.2 billion) from a Shanghai IPO by selling 15% of its share capital, according to the paper. "There are no technical problems, we are only waiting for the regulatory approval," the source said, noting that the bank hopes to go public ahead of ABC.   

In theory, that would be reasonable, given that China Everbright Bank started moving towards an IPO nearly a decade ago and filed the listing application in June 2008. By comparison, ABC didn't have the urge to go public until the other state-run banks started to line up high-profile listings in Hong Kong from 2005 onwards, and it only filed its application earlier this month.

ABC is pushing its mandated bookrunners at a frantic pace, however, and is now widely expected to go public as soon as July. It is aiming to raise up to $30 billion, which would make it the largest IPO on record, globally.

And in a highly regulated market such as China, the country's lenders have to comply with government priorities. As the last of China's major banks to go public, "ABC is at the top of the regulators' priority list and the bank is likely to be the first to tap the market," said May Yan, an analyst at Nomura International. However, "the government would want all banks to replenish their capital as soon as possible to improve asset quality", she added.

"Even though most of China's major banks are publicly traded companies and are supposed to operate like commercial entities, the fact that their biggest shareholder is still the government makes them obliged to follow Beijing's command," said Tony Tang, a banking analyst at China Everbright Research.

The state-owned Assets Supervision and Administration Commission, which is a government entity under the State Council (China's cabinet), has the controlling stake in all state-run firms in the country.

That said, China Everbright Bank, like its domestic competitors, is in a very passive position. It was initially expected to go public in Shanghai before the Beijing Olympics, which kicked off in August 2008. The Chinese government showed strong support for the plan by approving a Rmb20 billion capital injection from the nation's sovereign wealth fund in 2007 to allow the bank to tidy up its balance sheet. Such capital injections have traditionally been a key precursor to an IPO for China's major banks.

The government also relocated Tang Shuangning from his former post as the vice-chairman of the China Banking Regulatory Commission to chairman of China Everbright Bank as well as its parent company China Everbright Group. The bank hired China International Capital Corp, Shenyin Wanguo Securities and China Jianyin Investment Securities as underwriters for the IPO and filed an application with the securities regulator to sell new shares, signalling the bank was on its way to a public offering.

But China Everbright Bank didn't receive any approval and expectations of an IPO were doused along with the Olympic flame. The nosedive in share prices in late 2008 then prompted the Chinese government to suspend fundraising activities until the first half of 2009. And when things went back to normal again, Beijing's priorities had changed.

China Everbright Bank did get the green light from the regulatory authorities for a Rmb11.5 billion private share placement last year, but after a year of aggressive lending it probably can't stay afloat on that for long.

The bank's new credit growth increased to 38.5% in 2009, leaving the lender with a lower than average 6.89% core capital adequacy ratio (CAR) at the end of last year. China's banking regulator requires all lenders to have a core CAR of no less than 7% and most major banks in the country exceed that level.

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