Investors get Jinzhou jitters

Bank of Jinzhou raises $800 million and a lot of eyebrows

The city’s name means colourful prefecture, but the Hong Kong flotation of the largest commercial bank in Jinzhou has appeared nothing but drab. Bank of Jinzhou raised about $800 million in its initial public offering last week but only after the Liaoning-based lender had attracted one of the worst investor receptions in recent years, with just 4% of the retail tranche covered.

Bank of Jinzhou, alongside Bank of Qingdao and Bank of Zhengzhou, has been rushing to go public in Hong Kong before year-end. The trio of city commercial banks are all trying to recapitalise after a few years of extremely rapid loan growth.

Nationwide, figures from the banking regulator the CBRC show that city commercial banks’ assets rose 24% to Rmb21.2 trillion ($3.3 trillion) in the 12 months ending September. This is far higher than the 9.9% increase recorded by the big five lenders over the same period.

The fear is that this credit expansion has not been matched by equally careful due diligence. Moreover, the nature of small regional banks means many of their loans are concentrated in a few local companies. As of September, city commercial banks averaged non-performing loan ratios of 1.44%, up 33 basis points from last year.

Bank of Jinzhou had a lower than average NPL ratio of 0.99%. However, in a heavily critical editorial, Hong Kong’s South China Morning Post blasted the territory’s stock market regulators for letting the IPO go ahead because of questions about the bank’s loan book.

In fact, Bank of Jinzhou had unsuccessfully applied to list in Shanghai in 2011, as China’s own stock regulator (the CSRC) questioned whether it was making loans to SOEs so the latter could buy back their own bad debts and clean up Bank of Jinzhou’s balance sheet. The lender had replied that only a “very limited” amount of lending did not meet regulatory requirements.

Where the Hong Kong IPO is concerned, journalists have been querying how the bank was suddenly able to halve its Rmb9.4 billion exposure to troubled solar panel maker Hanergy just ahead of its listing. As the SCMP explains, the bank was “miraculously” able to find, “two ‘independent’ mainland financial institutions which purchased Rmb2 billion of exposure at face value.” Hanergy itself also repaid a further Rmb2.6 billion.

The SCMP asks who would have been generous enough to take up these loans at no discount to face value when the collateral which backed them was the shares of Hanergy, a company suspended from trading since May (see WiC303 on how quickly Hanergy has been losing its shine). The solar firm remains under investigation by financial regulators.

Bank of Jinzhou is a “showpiece of all the ills of city banks in mainland China,” SCMP concludes

Institutional investors also shied away from the IPO. As one fund manager tells WiC: “These city commercial bank IPOs are a total waste of time for us right now because of the regulatory requirement to price them at book value or above.”

With the exception of the Shenyang-based Bank of Shengjing, the largest city commercial bank listed in Hong Kong, the whole sector is trading below their projected 2016 book values.

Nevertheless, both Bank of Jinzhou and Bank of Qingdao were able to complete their fundraising from Hong Kong’s primary market, while Bank of Zhengzhou is mid-way through its own flotation. And as WiC went to press, the two lenders were both trading marginally higher than their offering prices.

Paradoxically, a perkier IPO looks to be that of Postal Savings Bank, which could surprisingly prove to be one of next year’s hottest new offerings. It recently added China Life and Tencent to the list of major local firms that were investing in its mega-IPO, raising $7 billion from what the Wall Street Journal called “a star-studded roster of investors”. It means that at least 70% of its $10 billion offering is already cornered by powerful Chinese corporations.

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