PSBC prepares year's biggest IPO

Postal Savings Bank of China, China’s largest banking by retail network, has begun gauging investor interest for its mammoth $8 billion Hong Kong listing.

Postal Savings Bank of China, the country’s largest lender by number of branches, kicked off its listing process on Monday by launching pre-deal investor education for what promises to be the world’s biggest initial public offering this year.   

The listing of PSBC, which will doubtless hog the attention of Hong Kong’s primary market in the next month or so because of the deal's size and the bank's unique role in the Chinese banking system, is expected to raise $8 billion.

That would make it the biggest IPO since Japan Post’s three-way listing in November last year and the largest deal in Hong Kong since Agricultural Bank of China’s $22.1 billion IPO six years ago.

Similar to Japan Post, the partial privatisation of PSBC is aimed at making the lender more efficient by introducing private investors.

Just how big a stake PSBC intends to sell remains to be divulged but the listing is expected in October and marks another key step in the opening up of the country’s banking system.

In the first wave of banking privatisation from 2006 to 2010, the listing of China’s so-called Big 4 banks – Bank of China, Industrial & Commericial Bank of China, China Construction Bank, and Agricultural Bank of China – played an important role in fuelling China’s breakneck economic growth, which averaged 11.3% over the five-year period.

The upcoming listing of PSBC represents a second phase of that reform process, which will allow foreign investors to invest deeper into China’s underdeveloped regions – areas that could potentially benefit from the country’s rural transformation process.

Relatively clean

For foreign investors that have steered clear of Chinese banks due to bad debt worries, PSBC is potentially a more attractive investment option because of its low exposure to China's most debt-laden companies, mainly state-owned enterprises in industries suffering from overcapacity, such as iron and steel, cement, and shipbuilding.

PSBC’s clean balance sheet and its extensive retail network in the world’s most populous country will be key marketing themes, bankers familiar with the IPO told FinanceAsia

PSBC has been able to keep its balance sheet clean because it is not obliged to support these zombie companies, unlike other Chinese banks, including the Big 4.

Instead, PSBC is tasked with serving “Sannong” – a Chinese terminology that refers to agriculture, rural areas, and farmers – when it was established in 2007 by the China Banking Regulatory Commission and Ministry of Finance.

Chinese leaders have emphasised the importance of Sannong to China’s economic prosperity and social stability, not only because the country has traditionally been an agrarian state but also because the country has a much higher rural population compared with developed nations.

PSBC’s banking business originates from China Post Group’s extensive postal and remittance services, which cover remote villages and townships. Since many of them are hard-to-reach areas, the post offices have become the only place for external communication. Naturally, it developed the banking business by offering deposit and lending services to rural residents and subsequently corporate loan and credit card services to small and medium-sized enterprises.

As of the end of March, PSBC had 40,057 retail outlets serving a client base very different to those of other nationwide commercial banks. Its geographical coverage is also much wider compared with regional rural lenders such as Chongqing Rural Commercial Bank.

At the end of 2015, PSBC had 505 million customers, more than one-third of China's population and 50% larger than the entire US population.

Lower default rate

One banker familiar with the situation said the default rate of personal loans in rural areas, which accounted for 48.7% of PSBC’s loan book as of the end of March, are relatively lower because the terms and structures of these loans are usually simpler.

“Rural residents usually lend for personal reasons, such as buying a car, repairing their equipment, or sending their children for education in developed cities. They are usually able to pay off their loans,” said one head of China equity capital markets at a bulge-bracket investment bank. “That is contrary to corporate loans in developed regions, which could be used for investment purposes.”

PSBC’s non-performing loan ratio, a key measure of asset quality and financial health, was 0.81% at the end of March. It was more than 50% lower than the industry average of 1.75% and the Big 4 average of 1.78%, illustrating the degree to which PSBC is less risky in terms of its lending exposure.

Syndicate analysts said PSBC’s higher allowance coverage ratio of 286.7% (compared with the average 154.7% for listed state-owned banks) means it is more defensively positioned, given China’s slowing economic growth and weakening credit cycle.

“PSBC will appeal to investors that [want a] safer and more defensive investment in the banking sector that makes regular dividend payments,” the second banker said.

Challenges

On the flip side, the PSBC faces operational challenges since China's rural residents are increasingly able to access the internet banking services of its competitors.

The bank, which hopes wealth management will be one of its key growth drivers, is also likely to face competition from internet-based financial service platforms such as Yuebao, the online mutual fund management arm of internet giant Alibaba.

PSBC's corporate lending business faces skewed credit risks too because China Railway Corporation is easily its largest single borrower. The state-owned railway group’s Rmb243 billion ($36.4 billion) loan accounts for 25% of the bank's corporate loan book. 

In addition, it is almost certain PSBC will sell shares at a significant premium to other Hong Kong-listed Chinese banks since all of them currently trade below their respective book values. This is because state-owned Chinese banks are not allowed to sell their shares at sub-book value in an IPO.

UBS has estimated that the bank’s fair value should lie between $49 billion and $63 billion, or 0.93 to 1.19 times PSBC’s estimated 2016 book value of HK$411 billion ($53 billion).

PSBC will likely to be a low-alpha stock given its defensive nature, which means it is less likely to offer any surprises on its earnings in the short term. The lender’s high exposure to retail Chinese also implies that it could suffer if China’s economic slowdown is faster than expected, potentially dragging down overall loan growth.

Joint sponsors of PSBC’s IPO are CICC, Morgan Stanley, Bank of America Merrill Lynch, Goldman Sachs and JP Morgan. UBS is the sole financial advisor.

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