Despite its 5,000 year history, China didn’t open its first modern bank till May 1897. According to historian Jonathan Fenby, the Imperial Bank was set up by a decree from the Chinese emperor Guangxu and even headhunted a general manager from Hongkong and Shanghai Bank (HSBC) to get it off the ground. His mission was to run it using the same ‘sound Scottish banking principles’ that HSBC’s own charter had specified when it was founded in 1865.
The next major milestone in the evolution of China’s banking industry was in 1951, with the founding of the Agricultural Bank of China (ABC). A manifestation of Mao Zedong’s peasant-led revolution, ABC’s mission statement didn’t include much mention of sound Scottish banking principles. Indeed, as recently as 2007 its 450,000 staff had ran up $119 billion worth of non-performing loans. Most analysts viewed it as a banking sector basketcase.
But as reported in WiC1, a massive clean-up ensued. It received a $19 billion injection from China’s sovereign-wealth fund, and removed Rmb800 billion worth of bad loans from its balance sheet. Over the last few years, the bank has chased profits by lending more to customers in urban areas.
The goal was to ready it for a listing. And after many delays – some of its own making and some based on the global financial meltdown – ABC this week mandated six lead managers for a mega-IPO that could raise as much as Rmb200 billion ($29 billion) later this year.
At first glance, ABC seems to be doing well: in 2009 profits were up by 26.3% to Rmb65 billion (although it is not clear how much of this is due to successful restructuring and how much to the country’s recent credit binge).
Then again, when ABC’s earnings are compared to its peers, it has some catching up to do. In the first nine months of last year, ABC’s net profit was Rmb50 billion on assets of Rmb8.6 trillion. In the same period, Bank of China made Rmb62 billion on assets worth Rmb8.3 trillion.
“Agricultural Bank has the weakest fundamentals among the big state-owned banks,” Nan Sheng, an analyst at UOB Kayhian Investment, told Bloomberg. “Its IPO price certainly can’t exceed the others banks’ share prices,” Sheng added.
Promoters of the deal will point out that ABC’s non-performing loan ratio and capital adequacy ratio, at 2.9% and 10% respectively at the end of 2009, are healthier than those of the other leading banks when they were listed between 2005 and 2007. Nor has it been slovenly in chasing market share: in the first quarter it lent Rmb245.7 billion, the most of the ‘Big Four’ Chinese banks.
It also helps that rural lending is a hot topic for bank regulators, who are keen to extend wider credit facilities to the countryside. The plan is to set up hundreds of new village banks, loan companies and credit unions by 2011. ABC is already active in the sector.
One concern might be that the government is shepherding lenders into a politically-sensitive but loss-making market. But this looks less likely when you take into account that many of the leading foreign banks are also interested in setting up branches in villages, as are some of China’s city lenders, such as Huaxia Bank. The foreign banks are doing so to avoid the competitive disadvantages they face in the cities, while the city banks are looking for opportunities to expand outside of traditional markets.
HSBC, for example, opened its first village bank facilities in December 2007, and has increased its rural network to a total of five in different areas of the country.
Its first branch network, in Suizhou County, Hubei Province, is expected to start making a profit next year. And it plans to continue expanding: “According to the opening rates in the past, HSBC will probably build three to four village banks a year, and we will also upen up outlets and establish a number of branches under the village banks,” Li Huiqian, head of HSBC’s village bank business, told XinhuaNet.
China’s largest private sector bank, Minsheng Bank, is also looking to head into the wilderness. The bank’s chairman, Dong Wenbiao, recently said that it will set up around 30 village banks in the next three years.
Of course, private money’s rural push will be less motivated by supporting government policy and more by the opportunity to make money. And if the market does look like a profitable one, the fact that ABC has the largest network in China (currently around 25,000 branches) puts it in a strong position to capitalise on rural growth.
While it is true that there are concerns relating to the thinner profit margins of village lending, it is also worth remembering that the $29 billion ABC hopes to raise from the IPO could stimulate an awful lot of rural consumption – which will please policymakers (and not just in China). As WiC has discussed previously (WiC53, Talking Point) many of China’s 737 million country folk have already started spending more. The hope is they’ll become another engine of Chinese GDP growth.
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