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Thursday, 5 November 2009
Silly to float Big 4 bank when state is buying back shares
You have to wonder why he is bothering. It makes little sense for Agricultural Bank to go public with a stock offering when the state is busy buying back the shares of banks it sold just a few years ago.
Silly to float Big 4 bank when state is buying back shares
Tom Holland 28 October 2009
Speaking at the weekend, Zhang Yun, the boss of Agricultural Bank of China, the only one of the mainland’s Big Four state banks still without a stock exchange listing, said he was aiming to complete an initial public offering “as soon as possible”.
Reports from the mainland indicate that Zhang is lining up one or more strategic investors as he prepares to float Agricultural Bank on the Shanghai Stock Exchange - and possibly in Hong Kong, too - next year.
You have to wonder why he is bothering. It makes little sense for Agricultural Bank to go public with a stock offering when the state is busy buying back the shares of banks it sold just a few years ago.
When Beijing readied the other three of the Big Four - China Construction Bank Corp, Bank of China and Industrial and Commercial Bank of China - for flotation in 2005 and 2006, the logic behind the share sales appeared compelling.
Foreign strategic investors were supposed to bring in much-needed commercial know-how and management expertise. Flotations would help raise capital ratios to acceptable levels following heavy write-downs of bad assets. And listings in Hong Kong would compel the banks to adopt best-practice standards of transparency, while the scrutiny of an experienced analyst community and a demanding international investor base would force them to raise their games.
As a result, the mainland’s state banks, which had previously acted like crosses between arms of the finance ministry and state welfare agencies, would be transformed miraculously into cutting-edge commercial entities, free from official interference and equipped to compete with their international peers in the world’s financial markets. That was the idea, and foreign investors bought in with a will.
But things didn’t quite work out as planned. Foreign strategic shareholders gained little management influence and were quickly relegated to purely financial investors. Weakened by last year’s financial crisis, several, including UBS and Royal Bank of Scotland Group, took the first available opportunity to cash in their stakes. Meanwhile, the notion that listing had converted the mainland’s big banks into commercial ventures was severely dented this year when they ramped up lending in response to government orders to stimulate the economy. Over the first nine months, mainland banks extended 8.7 trillion yuan (HK$9.87 trillion) in new loans, 75 per cent more than in the whole of last year.
As if to confirm that the mainland’s big banks are still arms of government, Central Huijin Investment, a subsidiary of the country’s sovereign wealth fund, is busy buying back bank shares on the open market, raising its stakes in ICBC, Construction Bank and Bank of China to 35.42 per cent, 57.09 per cent and 67.53 per cent respectively.
These purchases make a nonsense of the original privatisations, especially as Huijin is ultimately controlled by the finance ministry, the body that sold the bank shares in the first place.
What’s more, as the first chart shows, recent purchases of H shares would have been done at a significant premium to the original issue prices. The same holds for A shares in ICBC and Bank of China, although A shares in Construction Bank are trading below their flotation price.
If Beijing is going to sell low and buy back high, there is little point in privatising Agricultural Bank. It might as well not bother and save money.
It’s true that a stock offering would help raise capital. After their recent lending spree, mainland banks’ capital adequacy ratios fall well short of international comfort levels. From third-quarter results released on Friday, we can estimate that Construction Bank’s ratio of core tier-1 capital - essentially share capital plus retained earnings - to risk-weighted assets had fallen to 6.6 per cent by the end of last month from 7.4 per cent at the end of last year. As the second chart shows, that’s well below the 8 per cent level widely regarded as prudent for major banks and compares poorly with international peers such as HSBC Holdings, which have recently raised fresh capital.
But Beijing doesn’t need to sell shares in order to raise banks’ capital levels. It could simply bolster their ratios by injecting some of its vast pile of foreign reserves, as it has done before.
Of course, if floating Agricultural Bank looks like a silly move for Beijing, it should be a great opportunity for ordinary investors. On previous form, they will be able to subscribe for shares safe in the knowledge that the government will be prepared to buy them back again later at a higher price.
2 comments:
Silly to float Big 4 bank when state is buying back shares
Tom Holland
28 October 2009
Speaking at the weekend, Zhang Yun, the boss of Agricultural Bank of China, the only one of the mainland’s Big Four state banks still without a stock exchange listing, said he was aiming to complete an initial public offering “as soon as possible”.
Reports from the mainland indicate that Zhang is lining up one or more strategic investors as he prepares to float Agricultural Bank on the Shanghai Stock Exchange - and possibly in Hong Kong, too - next year.
You have to wonder why he is bothering. It makes little sense for Agricultural Bank to go public with a stock offering when the state is busy buying back the shares of banks it sold just a few years ago.
When Beijing readied the other three of the Big Four - China Construction Bank Corp, Bank of China and Industrial and Commercial Bank of China - for flotation in 2005 and 2006, the logic behind the share sales appeared compelling.
Foreign strategic investors were supposed to bring in much-needed commercial know-how and management expertise. Flotations would help raise capital ratios to acceptable levels following heavy write-downs of bad assets. And listings in Hong Kong would compel the banks to adopt best-practice standards of transparency, while the scrutiny of an experienced analyst community and a demanding international investor base would force them to raise their games.
As a result, the mainland’s state banks, which had previously acted like crosses between arms of the finance ministry and state welfare agencies, would be transformed miraculously into cutting-edge commercial entities, free from official interference and equipped to compete with their international peers in the world’s financial markets. That was the idea, and foreign investors bought in with a will.
But things didn’t quite work out as planned. Foreign strategic shareholders gained little management influence and were quickly relegated to purely financial investors. Weakened by last year’s financial crisis, several, including UBS and Royal Bank of Scotland Group, took the first available opportunity to cash in their stakes. Meanwhile, the notion that listing had converted the mainland’s big banks into commercial ventures was severely dented this year when they ramped up lending in response to government orders to stimulate the economy. Over the first nine months, mainland banks extended 8.7 trillion yuan (HK$9.87 trillion) in new loans, 75 per cent more than in the whole of last year.
As if to confirm that the mainland’s big banks are still arms of government, Central Huijin Investment, a subsidiary of the country’s sovereign wealth fund, is busy buying back bank shares on the open market, raising its stakes in ICBC, Construction Bank and Bank of China to 35.42 per cent, 57.09 per cent and 67.53 per cent respectively.
These purchases make a nonsense of the original privatisations, especially as Huijin is ultimately controlled by the finance ministry, the body that sold the bank shares in the first place.
What’s more, as the first chart shows, recent purchases of H shares would have been done at a significant premium to the original issue prices. The same holds for A shares in ICBC and Bank of China, although A shares in Construction Bank are trading below their flotation price.
If Beijing is going to sell low and buy back high, there is little point in privatising Agricultural Bank. It might as well not bother and save money.
It’s true that a stock offering would help raise capital. After their recent lending spree, mainland banks’ capital adequacy ratios fall well short of international comfort levels. From third-quarter results released on Friday, we can estimate that Construction Bank’s ratio of core tier-1 capital - essentially share capital plus retained earnings - to risk-weighted assets had fallen to 6.6 per cent by the end of last month from 7.4 per cent at the end of last year. As the second chart shows, that’s well below the 8 per cent level widely regarded as prudent for major banks and compares poorly with international peers such as HSBC Holdings, which have recently raised fresh capital.
But Beijing doesn’t need to sell shares in order to raise banks’ capital levels. It could simply bolster their ratios by injecting some of its vast pile of foreign reserves, as it has done before.
Of course, if floating Agricultural Bank looks like a silly move for Beijing, it should be a great opportunity for ordinary investors. On previous form, they will be able to subscribe for shares safe in the knowledge that the government will be prepared to buy them back again later at a higher price.
You can call it banking on the state.
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