Postal Savings Bank of China Co. Ltd (HKG: 1658) – Market cap as of 30/09/2016: $49.63bn

Introductions

Postal Savings Bank of China (PSBC) rang the bell on Wednesday for its Hong Kong IPO at HK$4.77 ($0.61) a share. The PSBC listing is the largest IPO in terms of total proceeds since 2014, when Alibaba’s $25 billion New York listing set the global record.

About Postal Savings Bank of China

Postal Savings Bank of China Co. is a subsidiary of China Post Group Corporation, established in 2007 and image-1-worlds-largest-iposheadquartered in Beijing.

It provides various banking products and services for retail and corporate customers in the People’s Republic of China. It operates through Personal Banking, Corporate Banking, and Treasury segments. PSBC was able to establish a successful business model based on both directly-operated outlets and agency outlets, and, as of March 31 2016, it had 40,057 outlets as well as 160,598 employees. This distribution network is the largest in China’s banking industry with the widest geographical coverage. Moreover, PSBC is strategically focused on providing financial services to communities and it serves the most promising customers during China’s economic transformation.

As of the latest practicable date, China Post Group directly held approximately 83.08% of PSBC capital. As of March 31, 2016, it had total assets of RMB 7,707.6bn, total deposits of RMB 6,732.4bn and total loans of RMB 2,665.8bn. From 2013 to 2015 total assets, total deposits, total loans and net profit recorded a CAGR of 14.4%, 10.0%, 28.7% and 8.4% respectively. Operating income increased by 8.8% from FY 2014 while from 2013 up to March 2016, PSBC distributed total cash dividends of RMB 2.0bn.

The Chinese financial industry

In the first quarter of 2016, the Chinese government led efforts to help the transition in China’s economy, affected by a slowdown, towards more balanced growth.

In the beginning, GDP growth slowed down: based on preliminary calculations, China’s GDP in the first quarter of 2016 was approximately RMB 15.9tn, a YoY increase of 6.7% at comparable prices with respect to 2015. It was also registered a drop in import and export trade: in the first quarter of 2016, the total volume of import and export trade amounted to RMB 5.2tn, a YoY decrease of 5.9% compared to the previous year.

In this challenging environment, the financial industry reacted with a continuous balance sheet expansion. Banks placed more emphasis on balancing capital, risk and income and further optimizing their asset allocation structures.  As non-credit assets became increasingly important, banks started to take an active stance on their liability businesses and tried to diversify the risk though their fixed income, interbank deposits and asset securitization businesses. Moreover, considering the same period, securities investments took up an increasing share of banks’ total assets.

On average the total operating income of listed banks increased by 10.56% YoY in the first quarter of 2016. Bank deposits grew at a slower rate and credit demand remained sluggish. Interest-bearing assets grew at a slow but steady rate. Together with an increase in credit risk, listed banks saw an increase in total non-performing loans (NPLs) and most recorded an increase in NPL ratios.

Net profits among listed banks increased YoY, albeit at a slower rate as the central bank released a lower benchmark loan rate. This assisted listed banks in their asset re-pricing, resulting in narrower net interest margins. At the same time, banks’ NPL ratios continued to rise with credit costs hovering at high level.

image-2-npl-ratio-bar-chart

Source: KPMG                      

Structure and Market Reaction

The Global Offering comprises 605,330,000 H Shares in Hong Kong and an aggregate of initially 11,501,258,000 H Shares to be offered in the United States. The IPO represents approximately 15% of the enlarged issued share capital of the Bank immediately after completion of the Global Offering without taking into account the over-allotment option, not exercised in the end. Were the over-allotment option to be exercised in full, the offered shares would have represented approximately 16.87% of the enlarged issued share capital.

A group of six cornerstone investors agreed to purchase $5.7 billion or 77% of the shares on offer. These investors will be locked up in the investment for a minimum time horizon of six months.

Shares have been priced at HK$4.76, at the very low end of the range previously provided to investors by PSBC advisors (HK$4.68 – HK$5.12). However, analysts stated that even at the low end of the pricing range, PSBC’s shares had a top-heavy valuation slightly above book value, compared with peers currently priced at around 0.8 times book value. The shares closed at HK$4.77 ($0.62) on Wednesday afternoon in Hong Kong, slightly up than the IPO price. The stock has been trading in a very tight range all day.

Rationale

Postal Savings Bank of China currently has the largest distribution network and customer base in China. Moreover, the bank is a key institution, providing financing and serving clients in a challenging transformational moment for the country. PSBC is trying to raise capital through the IPO in order to strengthen its capital position and being able to position itself as the strongest financial institution in China. In the upcoming year, capital will be a focus item for financial institutions in China given the rising level of bad loans and the decreasing coverage ratios. That is why the management of PSBC believes that a strong capital base is the floor for further growth for the bank.

Risks and considerations

One of the main risks behind PSBC is strictly connected with the retail business in China: maintaining a high quality portfolio of loans granted both to physical people as well as to SMEs (Small and Medium Enterprises). Investors also bear the risk of an insufficient allowance for impaired losses in the future (currently standing at 286.71%). Moreover, loans provided by PSBC are concentrated in certain industries and regions where the financial condition of borrowers is deteriorating. Some analysts also stated that the collateral securing loans may not be adequate. Lastly, commercial banks are facing increasing competition from Internet-based financial services industry.

Our view is that the IPO, even if priced at the lowest end of the range, has been really successful given that the bank is now trading at a significantly higher price-to-book than its peers. The strong capital ratios that the firm is looking to achieve in the upcoming year reflect the commitment of the management to ensure the sustainability of the business. An interesting issue will be the Chinese NPLs and we do believe the problem will be relevant in 2017/18 when banks will look to refinance.

Advisors

26 advisors have been involved in the IPO and almost all major investment banks participated in the offering.

CICC, Morgan Stanley, Bank of America Merrill Lynch, Goldman Sachs and JP Morgan are PSBC’s sponsor banks – meaning they led the deal. UBS has been named sole financial advisor.

 

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