After an eight-year freeze, China is finally reopening the A-share IPO market to city and rural commercial banks, in a move that may stem the flow of mainland lenders looking to list in Hong Kong.
Bank of Jiangsu, after waiting for years for regulators to approve a Shanghai IPO of more than Rmb10bn (US$1.61bn), updated a preliminary prospectus on June 12, typically a sign that a listing hearing is imminent.
A mainland IPO for Bank of Jiangsu would be the first domestic listing for a regional Chinese lender since 2007, and may pave the way for similar fundraisings. Nine other lenders have been waiting for permission to launch their A-share IPOs for years.
“The regulator has resumed reviewing IPO applications for city and rural commercial banks,” said a banker on the deal. “Under the current pace of IPO issuance, Bank of Jiangsu’s float may be able to come out in weeks, if the approval comes smoothly.”
Shareholder lock-up
The China Securities Regulatory Commission has not approved any listing from a regional bank since Bank of Beijing, Bank of Nanjing and Bank of Ningbo went public in 2007, only for shareholders to ditch their stocks the following year. Bank of Beijing plunged to Rmb4.51 in September 2008, having been listed at Rmb12.5 a share 12 months earlier.
The massive sell-off led to heavy criticism from investors, and prompted rule changes aimed at limiting volatility.
Unlike other listed companies, Chinese regional banks often have a huge number of shareholders because they relied on funds from companies or individuals to fuel their growth.
To address the issue, the regulator made it a requirement in 2010 for senior executives and pre-IPO shareholders of regional banks to be subject to a 36-month lock-up after listing.
At that point, however, a falling stock market forced regulators to suspend all IPO approvals in late 2012, putting listings on hold for a year.
As a result, half of the 16 city commercial banks that had applied for a domestic listing either turned to Hong Kong or cancelled their IPO plans altogether.
Closer to home
Things may be different this time around. A buoyant stock market has convinced the regulator to let more, bigger IPOs come to the market, and bankers believe more mainland bank listings will serve a dual purpose.
“The CSRC wants to clear the heavy pipeline before shifting into a registration-based IPO system,” said a banker on another regional bank’s listing. “The government also wants regional banks to strengthen their capital bases through fundraisings in the capital market, so as to support the business of small and medium-sized enterprises.”
The CSRC also issued a notice on May 29 highlighting key regulatory issues on IPOs of small and medium-sized commercial banks, another hint that it was preparing to lift its block on the sector’s fundraisings.
According to the notice, the regulator will focus on reviewing 11 main aspects, including profitability, shareholding structure and the disposal of non-performing assets.
There are already signs that other regional lenders are now looking to list at home rather than overseas.
Bank of Shanghai, for example, has decided to focus on a domestic listing before its proposed Hong Kong IPO, according to two bankers familiar with the situation. The lender was looking to raise about Rmb20bn through a Shanghai IPO in the third quarter, said one of the bankers.
Harbin Bank and Huishang Bank, both listed in Hong Kong, have also recently proposed plans for Shanghai listings, betting they can raise money at higher valuations.
As of June 18, A-share listed city and rural commercial banks were trading at premiums of about 80% to their Hong Kong-listed peers, based on their P/B ratios.
Conservative
Being the first regional bank to hit the market, Bank of Jiangsu is looking to sell shares at a conservative valuation no higher than the industry average.
As of June 18, the one-month average historical earnings of the banking sector was 7.79 times, according to China Securities Index, a joint venture between the Shanghai and Shenzhen exchanges, which serves as the official pricing reference for domestic IPOs.
Bank of Jiangsu is looking to sell no more than 2.60bn shares, or up to 20% of its enlarged capital. The lender may fetch Rmb13bn from its float, based on its 2014 earnings per share of Rmb0.83, if it prices its stock at 7.79 times earnings.
Among the 12 lenders lining up for a A-share listings are Bank of Hangzhou, Bank of Guiyang, Bank of Chengdu, Wujiang Rural Commercial Bank, Jiangsu Changshu Rural Commercial Bank, Wuxi Rural Commercial Bank, Rural Commercial Bank of Zhangjiagang and Jiangsu Jiangyin Rural Commercial Bank.
BOC International (China) is the sponsor of the Bank of Jiangsu IPO. Proceeds will be used to strengthen the bank’s capital base.
