It’s a bank you’ve never heard of and it’s listing at a time when Chinese policymakers – spooked by a 5.1% inflation rate in November – could force banks to lend less, stunting their growth. A tough sell, then?
You might think so, but Chongqing Rural Commercial Bank (CRCB) raised $1.35 billion this week in the fourth largest IPO in Hong Kong this year. The offering won support from institutions including the life insurance unit of Taiwan’s Fubon Financial, and Abu Dhabi-backed Nexus Capital.
CRCB becomes the ninth Chinese bank to list in Hong Kong, but the first of the rural and city commercial banks to do so. These commercial banks exist in a different bracket to the Big Four state-owned banks (Bank of China, China Construction Bank, ICBC and Agricultural Bank of China), as well as to the mid-cap nationals like China Merchants Bank. Most were founded as co-operatives to finance projects that bigger banks had declined to back. In recent years, there have been a series of rounds of consolidation: CRCB itself was formed through the merger of 38 rural credit unions in Chongqing.
The lure for potential investors? Well, it’s an area of the banking sector that analysts reckon has strong growth prospects. Some of China’s rural provinces look a little under-banked relative to their urban cousins, and for CRCB in particular, the investment case was heavily hitched to the Chongqing story, something we have tracked this year at WiC too (see issue 77). China’s largest city posted economic growth at 18.2% over the past three years and expects to benefit further from government initiatives to accelerate development in inland China.
In fact, CRCB is not even the only bank in town with ambitions to grow. The Bank of Chongqing also wants to IPO, joining at least 20 similar banks nationwide waiting for approval to proceed from the securities regulator, the CSRC.
Many of the candidates want to grow beyond their traditional, geographic base. CRCB plans to increase its presence in western China, for instance, and Bank of Hangzhou harbours wider ambitions for the Yangtze River Delta region.
Why the delays for those still queued up to list? One challenge is in establishing a clear ownership structure, says Caijing magazine. In 2007, Bank of Beijing, Bank of Ningbo and Bank of Nanjing launched IPOs of their own on the domestic stock market. But post-listing the coverage concentrated on the windfall gains enjoyed by a small group of executives. Rules have since been changed to allow for a “shareholder clean-up” process, according to the magazine.
The trade-off for the sector’s higher growth potential is that it also brings greater risk, especially in lending to small-and-medium sized businesses. CRCB is also more exposed than most to property lending, according to analysts, with more than twice the sector average in mortgage loans. Caijing also reported that CRCB’s non-performing loan ratio – at about 3% – exceeds that of the larger banks.
Still, that has come down from the 10% figure identified in 2007, before the bank began a clean-up period in which many of the bad loans were disposed of.
Another concern is that the rural commercial banks lack the “too big to fail” guarantees enjoyed by the bigger lenders that have already gone public. But CRCB management countered these concerns by highlighting Chongqing’s aspirations to become the financial centre for western China – that means the municipal government will not want it to fail either.
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