Harbin Bank has priced its Hong Kong initial public offering slightly above the bottom end of its indicative price range on Tuesday morning. The 3.02 billion share deal for the Chinese bank came in at HK$2.9 per share, raising HK$8.76 billion ($1.1 billion) pre greenshoe.
The deal is Asia’s second largest IPO of the year-to-date, following the $3.1 billion listing of Hong Kong Electric Investments, a trust spun-off from Hong Kong tycoon Li Ka-shing’s Power Assets.
At first glance it seems surprising the deal will get done at all. Harbin is the fourth Chinese bank to list on the Hong Kong Stock Exchange in only six months and investor sentiment is extremely bearish thanks to the poor after-market performance of both its predecessors and the wider sector.
Chinese banking stocks are trading at historic lows. Valuations have been hit by a slowing PRC economy, concerns about the shadow banking sector and declining profitability thanks to competition from the booming internet financing industry led by the likes of tech giant Alibaba and interest rate liberalisation, which is pressuring net interest margins.
These headwinds led a number of news outlets to wrongly report that Harbin’s IPO had been pulled. However, the bank was able to cover the order book largely as a result of its own selling efforts to Mainland corporates and high net worth individuals – the same friends and family, which have enabled other Chinese banks to complete their recent flotations.
The largest portion of the deal went to seven cornerstone investors, who are all subject to a six-month lock up. Their $512.8 million commitment was announced ahead of the retail offering and is led by Fubon Life, which took $289 million, followed by Citic Capital on $150 million, with a further $73.8 million allocated to five Chinese groups comprising China Future Financial, Wah Tao International, Chongqing Tiantai Real Estate, Boom Win Holdings and Introwell.
A second group of Mainland entities took a big chunk of the remaining institutional book and again Harbin is said to have been the driving force behind their participation.
The Hong Kong retail book was 30% subscribed, meaning no clawback.
Pre greenshoe, Harbin will list 27.5% of its enlarged share capital, with trading scheduled to begin on March 31st. There is 90.9%/9.1% split between primary and secondary shares - the latter a divestment by China’s Social Security Fund.
Based on syndicate forecasts, the deal has been valued at 0.86 times 2014 price-to-book on a post money, post shoe basis. This puts it at a slight premium to all its listed comparables on both the Hong Kong and Shanghai stock exchanges.
The closest benchmarks are two other Hong Kong listed city commercial banks, Huishang Bank and Bank of Chongqing.
Huishang listed in November and is currently trading at 0.73 times 2014 book, down 13.5% from its IPO price of HK$3.53 per share. Bank of Chongqing listed in October and is trading at 0.68 times, down 18% from its IPO at HK$6 per share.
Three city commercial banks are also listed in Shanghai - Bank of Ningbo, Bank of Nanjing and Bank of Beijing. All three are also trading below 2014 book value at respectively 0.83, 0.75 and 0.70 times.
The only Chinese banks trading above 2014 book value are China’s two leading joint-stock banks, Citic Bank and China Minsheng Banking, at respectively 1.04 and 1.16 times.
So did Harbin deserve to come at a premium to the other city commercial banks? And will it succumb to the same downward pressure as its predecessors including China Everbright Bank, which has fallen 28.5% since its IPO last December?
Harbin stands up well to its peers on a number of levels. It has the largest number of branches and outlets of any of China’s 144 city commercial banks, with 301 compared to Bank of Beijing’s 251.
It has also successfully expanded outside of its home province of Heilongjiang, China’s old industrial heartland. Syndicate research flags this as a key differentiating factor given recent regulatory moves to stop city commercial banks from opening new branches outside their home provinces unless they already have a presence there.
This will not affect Harbin, which generates 48% of its loan book from operations in 14 other provinces, again the largest percentage of any city commercial bank. This business segment is also growing fast, with revenue from outside of Heilongjiang increasing from 14.4% in 2010 to 35.2% by September 2013.
Its home province is also doing well and is one of only two (the other being Hainan), whose estimated 2014 GDP of 8.5% is likely to top 2013.
One key risk factor for any investor considering the city commercial banks is how closely linked they are to their local governments and in particular their associated local government financing vehicles (LGFV’s). Harbin’s biggest shareholder is the Harbin city government, which will hold 18.58% of its equity post greenshoe.
But again, the bank scores well on this point since its exposure stood at 2.1% of its loan book as of September 2013, compared to a 4.9% sector average.
Harbin’s biggest selling point is probably its pioneering focus on micro-credit and SME lending. This accounted for 69.1% of its loan book as of September 2013, with growth of 24.1% during the first nine months of the year.
Margins on this type of business are high - 7.8% as of September 2013 - while NPLs at 1.14% are relatively low. By contrast the big national commercial banks reported average loan yields of 4.66% in 2012 and NPLs of 1%.
Harbin’s overall NPL ratio stood at 0.86% as of September 2013. The biggest drag was its exposure to the farming sector, which accounted for 11.6% of its loan book as of September 2013. A bad harvest in 2013 pushed up the NPL ratio to 3.84%.
According to syndicate research, city commercial banks as a whole have the best growth profile of any Chinese banks. Between 2007 and 2012, assets recorded a CAGR of 29.9%, compared to 16.1% by the large commercial banks.
As a group they currently have a 9.2% market share.
Their average ROA (Return on Assets) also surpassed the joint-stock banks in 2008 and stood at 1.2% in 2012, though this is still below the 1.33% average of the national commercial banks.
Syndicate banks forecast that Harbin’s net profit will grow by 17.6% in 2014 and 18.9% in 2015, while NPLs will peak at 1.05% in 2016.
A second key driving force for Harbin lies in ambitions to expand its Russian business, which benefits from a close geographical proximity. According to an agreement between the Chinese and Russian governments, the two hope to boost trade from $75 billion in 2012 to an estimated $200 billion by 2020.
Harbin plans to stand at the forefront of this trend. It is one of four CNY-RUB market makers and was the first Chinese bank to extend an RMB-denominated loan to Russia.
Analysts believe this will help the bank to expand its fee income, which currently represents 14.7% of total revenue compared to 3.6% in 2010.
Harbin will use proceeds from the IPO to boost its capital. As of September 2013, the bank had a capital adequacy ratio of 13.04%, already well above the 10.5% regulatory minimum.
Two of investors’ biggest concerns are likely to surround net interest margins, which are under severe pressure across the whole sector and exposure to interbank funding given regulatory efforts to restrict liquidity.
Analysts say Harbin will need to control its exposure to the latter, which stands at 32.9%. However, they are more sanguine about net interest margins despite forecasting a 50 basis point drop from 3.09% in 2012 to 2.46% by the end of 2013. Syndicate consensus forecasts a figure of 2.36% by the end of FY2016.
So where does this all leave Harbin? The Chinese banking sector has been on a steep downward trajectory since last May.
Harbin’s struggle to attract institutional and retail demand underlines either how heavy investors’ losses are, or how weighed down they feel by the sheer amount of capital being raised.
Yet, some analysts believe the bad news is now fully priced in and the cycle may have bottomed. Overweight recommendations are starting to return.
Joint sponsors of Harbin’s deal were ABC International, BOC International and CICC, alongside joint global co-ordinators Credit Suisse and Deutsche Bank. Joint bookrunners included Bocom International, China Merchants Securities, CIMB, CMB International, DBS and Haitong International Securities.