China's small banks head to market
By Olivia Chung

HONG KONG - Tumbling stock markets and deepening global concern over the US financial crisis are failing to deter China's push to list its small banks, as the government continues to look for ways to curb the country's excessive liquidity and draw more funds from circulation.

Three of the country's 100-plus city commercial banks, restructured to clarify share-ownership issues and to clear up bad loans, have already listed yuan-denominated A shares to strong demand as they benefit from offering modern banking services amid the country's surging economy.

Foreign investors can access the domestically listed A shares through funds established by approved overseas banks and brokerages and mainland China counterparts under the Qualified Foreign Institutional Investor scheme.

Bank of Ningbo's 4.14 billion yuan (US$554 million) A-share sale last July was oversubscribed 228 times and the stock has since doubled in value on the bank's strong growth prospects. The lender, based in coastal Zhejiang province and with Singapore's OCBC Bank as one of its shareholders, has estimated that profit last year jumped by between 30% and 50%, supported by higher income from credit-card fees and other consumer services.

The city banks are profiting from the edge given them by better knowledge of local commerce, markets and needs, compared with bigger lenders, according to Kenny Tang, associate director from Tung Tai Securities in Hong Kong.

"As city banks are familiar with the city governments and know the local market better than big lenders, they have an advantage ... when they are seeking more profitable sectors such as private banking and wealth management," Tang said.

The funds raised by IPOs will also help smaller banks respond to demand for loans from small and medium-sized companies keen to capture an increased share of the country's fast-growing economy, said Guo Tianyong, director of the banking research center under the Central University of Finance and Economics, said.

"Small and medium-sized enterprises, a key part of the economy, are short of capital supply,'' said Guo. At the same time, "going public will help city commercial banks compete against their bigger rivals."

The new funds will also help the lenders respond to government pressure to expand beyond their home areas, said Tang.

City banks have evolved from city credit unions set up in the mid-1990s initially to serve government-backed enterprises, regardless of the risks. The government, concerned that they were weak in risk management and fell short in serving private businesses as the country developed more along market-economy lines, began consolidating them into city commercial banks in the late 1990s.

The lenders, which according to business information providerResearchInChina held about 6%, or 2.59 trillion yuan, of the mainland banking system's total assets at the end of 2006, still have a responsibility to serve small and medium-sized businesses and promote local economic development.

The funds raised through IPOs, which follow popular overseas and local IPOs by the much country's larger top state-owned and joint-stock national banks, would help them to broaden the scope of services, Guo said. "They will have more funds to pump into more channels such as mutual funds, bonds and equity to diversify risks and improve profitability."

Hitherto, the city banks' income has come mainly from loan interest, while their deposits mainly came from corporate savings with about 10% from private savings.

Bank of Ningbo led the way with city bank IPOs along with Bank of Nanjing, partly owned by French lender BNP Paribas and based in the capital of eastern Jiangsu province, which raised 6.93 billion yuan last July.

Bank of Beijing, which raised $2 billion in September when it became the third city-level bank to go public in Shanghai, forecast profit would increase at least 50% in 2007. Net income rose 47% to 1.1 billion yuan in the third quarter on increased loans.

Those forecasts may not be out of line with reality, if earnings outlooks announced this week by bigger rivals such as Industrial and Commercial Bank of China (ICBC), the world's largest lender by market value, are anything to go by.

Even allowing for possible writedowns related to the US subprime mortgage crisis, ICBC forecast a 2007 profit jump of more than 60% to above 78 billion yuan. China Construction Bank Corp (CCB), the mainland's third-largest lender by assets, indicated a 48% gain to 68.56 billion yuan. Their performances could still lag those of China Merchants Bank and China Citic Bank Corp, both of which said they may have doubled profits last year.

Such figures should help spur demand for Bank of Shanghai, Bank of Tianjin, Hangzhou City Commercial Bank and Chongqing City Commercial Bank, which have all said they plan to go public without indicating details on venue, date or size of the intended listings.

Others looking to raise funds through IPOs include Jiangsu-based Changshu Rural Commercial Bank, in which Bank of Communications has agreed to invest 380 million yuan. Shanghai Daily quoted an unnamed source as saying Changshu Rural has hired China Securities Company to advise on the IPO.

Changshu Rural, which opened in November 2001, had 28.86 billion yuan in total assets at the end of last year. It has a capital adequacy ratio of 14.16%, compared with the regulatory minimum of 8%, and a non-performing loan rate of 1.24%.

Another candidate, Dongguan City Commercial Bank in Guangdong province, said in December it had hired Goldman Sachs Gaohua Securities to advise on a possible domestic IPO this year.

Olivia Chung is a senior Asia times Online reporter.