By Anette Jönsson 3 April 2007
Sources suggest the Chinese lender may raise more than $4 billion from the dual listing with a small portion going to cornerstone investors.
It isn’t the first and certainly not the largest, but the upcoming listing of China Citic Bank could provide a genuine test of investor appetite for Chinese financial stocks and indeed for the country’s growth story.
So far, the Mainland banks that have listed in Hong Kong have all been either one size bigger than the previous one that came to market or – in the case of China Merchants Bank - the first private sector lender to seek an offshore listing. Citic Bank is neither and some investors say this means it will have to rely a lot more on an attractive valuation to get the deal done.
Several bankers close to the lender disagree, however, and argue that Citic Bank, which is the country’s seventh largest commercial bank with total assets of Rmb706 billion ($91 billion) and 446 branches has enough clout on its own to draw in the buyers. It is widely regarded as a private sector bank even though its parent company has links to the central government, and will be only the second such bank to list in Hong Kong.
The key selling points include a leading corporate banking franchise; the fact that it is one of the fastest growing national banks with a high penetration in China’s affluent eastern coastal regions; and its position as one of the most profitable national banks in China judged by its average pre-tax return on assets of 1.2% in 2006. It also has one of the lowest cost-to-income ratios among the national banks at 51.6%.
Citic is also expected to benefit from being part of the Citic Group, which is the third largest enterprise in China and a significant player within the financial space generally. The parent also has a wider national footprint than the China Merchants Group, which includes China Merchants Bank, suggesting its group-related growth possibilities are larger.
On top of that, the deal is likely to tap into the huge amount of liquidity looking for China exposure.
“Banks are the epitome of a macro-play and I would argue that there is a lot more money chasing after the China macro story than there is bank paper, even if you include the likes of ICBC,” says one observer. Given the run-up in the share prices of other Mainland banks since their listings, investors should be keen to pick up newcomers at an IPO discount, he adds.
“After ICBC and China Merchants bank, people were saying that the market had had enough of these macro stories, and argued that the banks would need to differentiate themselves as portfolio managers were only going to own two,” adds a banker close to the deal. “But the more I look at this, I think Citic is another play on China’s macro story. It has some good angles to it, but the China macro story is still very alive in the equities market if you talk to investors.”
The Beijing-based bank yesterday (April 2) passed the final hurdle for a dual listing in Hong Kong and Shanghai when the Mainland regulators approved the A-share portion of the deal and is now set to launch what will become the largest Hong Kong IPO since Industrial and Commercial Bank of China’s massive $21.9 billion offering in October last year.
Market talk suggests Citic Bank could raise more than $4 billion from the combined H- and A-share offering, including shares that will be issued to its two strategic investors – Spanish lender Banco Bilbao Vizcaya Argentaria and the group’s Hong Kong-listed bank holding company Citic International Financial Holdings - as they exercise their anti-dilution options. BBVA currently owns 4.8% of the company, while CIFH has a 15.2% stake.
The H-share offer, which is available to international investors, will comprise 3.45 billion new shares or 9% of the bank plus approximately another 1.5 billion shares that will go to BBVA and CIFH, resulting in a total 12.9% of the company being sold in the form of H-shares. There will also be a greenshoe, which is expected to account for about 15% of the total H-share offering. If so (the final size has yet to be determined, according to people in the know) it would lift the portion of the company held by H-shareholders and BBVA combined to 14.8%.
In addition, the company will sell 2.3 billion new A-shares, corresponding to 6% of the company, to domestic Chinese investors. According to sources familiar with the offering, there will be no greenshoe for the A-share portion of the deal.
Pre-greenshoe and excluding the shares to be taken up by BBVA and CIFH, the H-share sale will account for 60% of the offering, or around $2 billion, while the A-share portion will account for 40%.
While the percentages are pretty much fixed by now, the dollar amounts can still change as the company and its five joint bookrunners have yet to decide on what valuation to use. An indicative price range will be set before Citic Bank launches the official roadshow just after the Easter Holidays on April 10.
According to investors, post listing it would be reasonable for Citic Bank to trade at a discount to China Merchants Bank, which is more profitable and is also benefiting from an early mover advantage within the retail banking and wealth management business, but at a premium to the big state-owned banks on the basis of the private banks being more nimble and having greater growth potential. However, investors say there is still a question about how much Citic Bank will leave on the table in the form of an IPO discount.
China Merchants’ H-shares currently trade at a 2007 price to book multiple of about 3.8 times, while ICBC trades at 2.8 times and Bank of China at 2.1 times. Bank of Communications, which is also state-owned but supported by the fact that HSBC holds a 20% stake, trades at about 3.5 times expected book value.
One of the challenges for the bookrunners will be to set the price range at a level that also accounts to some extent for the fact that the A-shares of the listed Mainland banks trade at significant premiums to the H-shares - ranging from 16% for China Merchants Bank (whose A-shares trades at 2007 P/B multiple of 4.4 times) to 28.6% for ICBC and 45% for BOC.
As such, it is highly likely that Citic Bank’s IPO price will look like a bargain for A-share investors and end up attract large numbers of speculative buyers, resulting in reduced allocations for everyone. However, sources say the price range will be the same for both the H- and A-share tranches (adjusted for the exchange rate), and will be set in relation to the valuations in the H-share market.
“I’m sure the banks on the H-share deal will be under quite a lot of pressure to maximise valuation because the H-share deal will be a lag on pricing,” one observer notes.
Five percent of the H-share offering of 3.45 billion shares will be earmarked for Hong Kong retail investors initially, although this could increase to 20% if a full clawback is triggered. Most of the remaining 95% will be offered to institutional investors, but a portion will also be set aside for three to five cornerstone investors, according to sources.
These will consist primarily of financial institutions, some of which were said to have been in discussions with Citic Bank about buying a strategic stake back when BBVA was invited aboard. The list of names is still being finalised, the sources say, but together they are expected to take up around 10% of the H-share offering.
These guys aside, one banker says this deal is still noticeable for the absence of a “tycoon tranche”, which has become almost a rule on large Mainland IPOs these days. While such pre-agreed orders can be helpful in terms of building confidence in a deal early in the roadshow, oftentimes they do also result in a significantly reduced allocation for other institutional investors – especially when there is a full clawback that cuts the institutional trance to 50%
A portion of the A-share offering will also go to cornerstones, sources say.
Between 2004 and 2006, Citic Bank achieved a compound annual growth rate of 19.4% for total assets, 22.9% for total loans, 19.2% for total deposits and 26.1% for net profit. The latter increased to Rmb3.9 billion ($505 million) in 2006.
The growth is however coming from a low base and the bank is still catching up on fee-income oriented businesses such as retail banking and wealth management which are typically regarded as key growth areas, notes one specialist. For now, its real strength continues to lie in its corporate banking franchise, which generated 79% of its income last year, but the retail side of the business does have “hidden potential,” he says.
The bank has reduced its non-performing loan ratio to 2.5% at the end of last year from 6.3% two years earlier. The bank did, however, receive capital injections totalling Rmb7.4 billion from Citic Group and CIFH on two occasions last year as it prepared for the stock market listing.
In 2005 it recorded a pre-tax profit per employee of Rmb520,000 ($67,350), which, according to a pre-listing information pack published by the bank, put it ahead of all other Mainland banks listed in Hong Kong or China. The pre-tax profit per head increased to Rmb620,000 in 2006.
Citic Securities, China International Capital Corp, Lehman Brothers, Citigroup and HSBC are joint bookrunners for the H-share portion of the offering. The trading debut is currently expected to take place on April 27.
Copyright FinanceAsia.com Ltd., a subsidiary of Haymarket Media Ltd
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