24 April 2019

Don’t get carried away by tide of regional bank IPOs

A rising tide of Chinese regional commercial banks is rushing into Hong Kong to get their name on the main board.

Among the keen new entrants is lesser-known Huishang Bank {徽商銀行} (03698.HK), which launched itself into the spotlight by securing two high-profile cornerstone investors: property heavyweight China Vanke (000002.CN, 200002.CN) and Chow Tai Fook Enterprises, owned by Hong Kong tycoon Cheng Yu-tung.

The Hong Kong Economic Journal, EJ Insight’s parent publication, reported that Vanke has splashed out more than 3 billion yuan (US$490 million) to be the Anhui-based lender’s largest shareholder, while Chow Tai Fook signed up for 200 million yuan in shares.

The Vanke and Chow Tai Fook-effect might ignite more interest in the offering but individual investors should keep their cool.

A closer look at the timing of Huishang Bank’s listing and those of its peers reveals a more fundamental factor at work — China’s implementation of the third Basel Accord. The accord calls for the baseline capital adequacy ratio for regional banks to rise to 10.5 percent, with smaller lenders having less than five years to meet that requirement. Caixin quoted a central bank official as saying that the shortfall could be around 1 trillion yuan.

At the same time, it’s anybody’s guess when domestic IPOs will resume, making Hong Kong an ideal fundraising substitute.

Notwithstanding the bank’s potential to reap the rewards of central China’s economic boom, analysts have expressed reservations about Huishang’s core competitiveness, as its business is still largely constrained within less-developed Anhui province.

Huishang has lagged its peers in the kind of reach that is essential to sustainable growth. Years ago when the China Banking Regulatory Commission (CBRC) was still lenient enough to allow regional lenders to set up branches outside their home bases, forerunners like Bank of Beijing (601169.CN) and Bank of Ningbo (002142,CN) established a functioning nationwide network, but Huishang did not venture out.

By the time Huishang wanted to penetrate into the neighboring Yangtze River Delta, the CBRC had already adopted a tougher line — Huishang’s plan to open its Shanghai branch is still pending, the 21st Century Business Herald reports.

Product portfolio can be another issue as Huishang hasn’t qualified as a principal underwriter for corporate bonds, giving enterprise clients less incentive to patronize the bank.

Mainland banking counters have disappointed in valuation and performance in the past few years. Top lender Industrial and Commercial Bank of China (01398.HK), for example, trades at about 15 percent under the level it did three years ago. Listed in late 2010, Chongqing Rural Commercial Bank (03618.HK) has remained 26 percent below its IPO price.

– Contact the writer at [email protected]



EJ Insight writer

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