A case of poor timing?

Great expectations?

Agricultural Bank of China’s (ABC) management began marketing its story to investors this week, hoping to top in size the $21.9 billion IPO of ICBC in 2006. As the China Daily observed: “The green light from the China Securities Regulatory Commission has dispelled all uncertainties about the float amid the recent market turmoil.” To get the deal done, however, the newspaper reports ABC will likely price its IPO at as little as 1.5 times its book value (ICBC managed 2.23 times).

The foreign media has focused more on the fact that the IPO has been scaled back from an initial $30 billion. Bloomberg reports that $23 billion is the new target – due to the deterioration in market conditions. The Financial Times notes that 40% of the deal is likely to be bought by sovereign wealth funds, which should make the task easier. And failure is not an option, the newspaper reckons: “ABC’s management and government officials have told bankers managing the deal they want to see the bank’s shares jump at least 10% on its trading debut.”

What are investors buying?

ABC is the country’s fourth largest lender, and in 2009 its outstanding loans hit $609 billion. With total assets of $1.3 trillion and deposits of $1.09 trillion, it is also the most rural of the state banks, which Hebei Youth Daily says could prove an advantage. It quotes the chief economist of Galaxy Securities who says that Grameen has proven how profitable a rural business can become. ABC is forecasting its 2010 profit will rise 26%.

The Lex column in the FT points out that ABC has more customers (320 million) than America has people, making it the world’s biggest retail bank, with 23,624 branches. However, FinanceAsia highlights that ABC (or AgBank as the Wall Street Journal calls it) is really two banks: a rural bank for farmers and an urban bank for China’s east coast. It estimates that 65% of the bank is in fact focused on urban areas.

Why IPO now?

Caixin magazine earlier reported that ABC’s two major shareholders, Huijin (see WiC62) and the Ministry of Finance wanted to delay – fearing the asset could be sold too cheaply in the unsettled markets, and that a botched deal would sour the pitch for other bank capital raisings. But as the magazine points out, like many of the Chinese banks, new funds are required: “ABC is determined to go through with the listing partly because its coffers were reduced in 2009 because of a lending binge.” At the end of last year, ABC’s capital adequacy ratio fell to 10.07%, below the regulatory minimum of 11.5%.

Foreign media enjoy pointing out that ABC has long been considered the worst bank in China. As recently as 2007 (prior to a massive clean-up and state asset injection) it had run up an impressively awful $117 billion of bad loans.

So the timing of its listing couldn’t be worse, given that China’s bank regulator has just issued a stark warning on a series of new bad loans that could soon emerge in the Chinese financial system. Blame the $1.4 trillion of loans the state banks made last year in support of the government’s stimulus plan, says Australia’s Business Spectator.

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