Jumping the queue

Red letter day for Postal Bank?

It has long been a case that the postman doesn’t knock twice for some of China’s regional and rural commercial banks. Nearly every single one that’s listed in Hong Kong has been queuing for some time to go public in Shanghai, where valuations are typically higher.

However, their ambitions to join China’s A-share market continue to be thwarted by the China Securities Regulatory Commission (CSRC), which has prioritised the fundraising plans of unlisted lenders since it lifted a lengthy IPO moratorium in 2015.

Banks listed in Hong Kong (as H-shares) like Harbin Bank and Bank of Zhengzhou have been on the waiting list since 2015. More recently, Chongqing Rural and Commercial Bank and Bank of Chongqing have joined the queue. In the meantime, a slew of unlisted banks have floated in China, including Bank of Hangzhou, Bank of Guiyang, Wujiang Rural Commercial Bank and Jiangsu Changshu Rural Commercial Bank.

To date, mainland exchanges have 25 listed banks compared to Hong Kong’s 21. And Shanghai looks set to host a new stock ticker soon, after Postal Savings Bank of China (PSBC) announced its intention to secure an A-share listing when it presented its first half results at the end of August.

In contrast to smaller H-share peers, banking specialists believe PSBC will be waved through. Dong Dengxin, professor at Wuhan University, tells Time Weekly, “This is a big central-level enterprise so it’s only a matter of course that it would list along side the five others.” (These are ICBC, CCB, Bank of China, ABC and Bank of Communications.)

“It’s not surprising the smaller H-share listed rural and city banks haven’t been allowed to list,” he also tells the Economic Observer. “The CSRC is very focused on the IPO traffic jam. It doesn’t want them grabbing valuable resources, which could be given to other non-listed banks.”

PSBC is China’s sixth largest bank by assets and its largest by branch network. Its HK$56.62 billion IPO in September 2016 also ranks as the world’s largest since Alibaba’s in 2014.

However, the two companies’ post-listing performance could not be more different. While Alibaba is up 257% since its IPO, PSBC is still trading below its HK$4.76 Iisting price.

It closed September 12 at HK$4.68, or 0.8 times its 2017 book value. One of the reasons it wants to raise new equity is because its overall capital adequacy ratio is a lowish 11.67%, although this is the result of faster than industry-average asset growth.

Its lacklustre secondary market performance is partly symptomatic of China’s deteriorating credit cycle. But it also reflects the dynamics of the Hong Kong IPO market, which has been awash with mispriced deals from the financial sector over the past few years. Foreign institutional investors have become increasingly vocal about their dislike of these banking deals, which are propped up by onshore friends-and-family investors and then trade down in Hong Kong’s secondary market.

For IPO candidates from the banking sector this is compounded by Beijing’s requirement for a floor valuation that’s at book value or above (most international investors believe Chinese banks should be valued below book).

However, the current A-to-H share premium of 21% means PSBC should be able to issue A-share equity around one times forward book. Ironically, while many of the H-share banks want to list back home, the banking A-to-H share premium narrowed to a low of 4% earlier this year (after Hong Kong’s stock market rallied).

The premium has been widening again since the summer after China’s stock markets started catching up with Hong Kong’s and analysts expect it to widen further still during the autumn months if the A-share rally continues.

There has also been a noticeable difference between the trading pattern of larger banks relative to smaller city and rural commercial banks. Traditionally A-share investors have favoured city and rural commercial banks because they have a higher growth profile, whereas H-share investors often prioritise larger banks, which they consider systemically safer and easier to trade.

However, this dynamic has shown signs of changing. To start with, investment flows in the two Stock Connect schemes are having a larger impact on Hong Kong (southbound investors now hold an average 6% of H-share banks).

More recently, smaller H-share banks have fallen out of favour. This is partly because of concerns about their shadow loan books (estimated at Rmb14.1 trillion by the end of 2016 or 18.9% of GDP).

These loans have become increasingly concentrated in a clutch of regional banks, particularly in the more economically depressed Northeast. As a result, banks such as Jinzhou Bank and Zheshang Bank have underperformed. Both have shadow loan exposures 1.5 to two times larger than their “standard” loan books. Jinzhou Bank’s stock is down 15.9% this year.

Another possible factor: investor concern that banks are going to be more exposed to potentially costly debt-to-equity swaps (see page 15 for more on this topic).

Meanwhile, anyone buying PSBC’s A-shares will be hoping its stock performs better in Shanghai than it has thus far done in Hong Kong.

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