Chongqing bank raises $1.35 billion ahead of HK listing

Chongqing Rural Commercial Bank (CRCB) has priced its initial public offering at the mid-point of the indicated range for a total deal size of HK$10.5 billion ($1.35 billion), and on Thursday will become the ninth Chinese bank to list in Hong Kong.

However, it will also be the first among the country’s city commercial banks to go public here. This means it is offering investors exposure to a slightly different part of China’s financial markets, where risks may be somewhat higher, but where the growth prospects are also outweighing those of the Big Four state-owned banks and the mid-cap national banks listed in Hong Kong.

Syndicate research reports argue that CRCB’s positioning as a market leader in Chongqing in western China -- one of the country’s fastest growing regions – together with the fact that its asset quality, fee income and cost efficiency ratios are all coming from a low base, makes it poised for significant growth and improvement. As of the end of June, it had total assets of $39 billion.

According to sources, the deal was multiple times covered and at the final price the institutional order book included a lot of high-quality names. In all, close to 200 institutional investors participated in the deal and there was very little order inflation. Retail investors were not too enthusiastic, however, and no clawback was triggered.

Institutional investors were price sensitive, but people close to the deal said those limits could likely have been moved to set the price even higher. The bookrunners didn’t seriously try though, since CRCB was happy to price at the mid-point to help boost the aftermarket performance. During the final two days of the bookbuilding, joint bookrunners Morgan Stanley and Nomura were indicating to investors that the price would likely be between HK$5.25 – which is where it was eventually fixed -- and HK$5.50.

Observers said the pricing was sensible given that the bank will start trading just a week before Christmas. Deals are still getting done [see separate story on our website today], but trading volumes are down and investors are generally reducing risk in their portfolios. The early feedback was that investors wanted CRCB to come at a discount to Agricultural Bank of China (ABC) and while the entire range was set with this in mind, the mid-point obviously leaves more room for gains as the stock starts trading. Syndicate research estimated the fair value in a range between 1.7 and 2.3 times book.

The beginning of last week was also tough for mainland financial stocks, amid lingering concerns that China may soon raise interest rates again. Nearest comp ABC was down 4.2% by the Wednesday close and Bank of China was off 2.8%. China Construction Bank and Industrial and Commercial Bank of China fell 1.4% and 1.8% respectively. This may have contributed to the restraint on pricing as well.

The People’s Bank of China didn’t hike rates last week, but in response to Friday’s stronger-than-expected data on lending and exports it did raise the reserve requirements for banks later that evening. It was the sixth time this year and the third time in the past month that the reserve requirement has been raised, reflecting the central bank’s worries about rising inflation and property market turnover. The 50bp increase brings the reserve requirement to 18.5% for large banks.

In a research note following the move, the Royal Bank of Canada said the increase “may reduce the chances of an immediate rate hike in the next few days, though it is worth recalling that the last rate increase on October 19 took place soon after reserve requirements were raised for China's largest banks on October 11”.

And HSBC economists Qu Hongbin and Sun Junwei were on the same track, stressing that “this reserve ratio hike is not a substitute for the next anticipated interest rate hike. Another rate hike of modest proportions is still needed to anchor inflationary expectations”. The pair said they continue to expect a 25bp rate hike soon.

In other words, Chinese banks may remain under pressure in the days leading up to CRCB’s trading debut on Thursday.

But having fixed the price at HK$5.25 per share, the mid-point of the HK$4.50 to HK$6.00 range, CRCB has left itself some room in case that does happen. At the IPO price the Chongqing-based bank is valued at 1.77 times its 2010 book value, after including the 15% greenshoe. This compares with a price-to-book multiple just above two for ABC. The latter has gained 27% since its IPO in July, which was priced at a 2010 P/B multiple of 1.68 times. 

CRCB offered 2 billion new shares, with 7.5% set aside for retail investors and the rest targeted at institutions. And with the retail tranche between four and five times covered, according to sources, there was no change to this ratio. There was potential to increase the retail portion to as much as 27.5% through automatic clawback triggers, but that would have required significantly more demand. Even to increase it to just 10% would have needed twice as much interest from the Hong Kong public, or a subscription ratio of more than 10 times.

However, a smaller retail tranche could help stabilise the share price in the aftermarket as there are likely to be fewer early sellers.

Sources said the institutional demand was driven by long-only asset managers and that the conversion ratio from the roadshow was quite high. Interestingly, the portion of demand from the US was also strong relative to a typical Hong Kong IPO, although, as usual, Asia-based accounts made up the bulk of the order book.

The deal was also supported by four cornerstone investors, which bought a combined $240 million worth of shares, or close to 18% of the offering. The largest among them was Nexus Capital, the investment company of the Abu Dhabi royal family, which invested $100 million. Hong Kong-based fund manager Value Partners bought $80 million worth of shares; and Cheng Yu-tung’s Chow Tai Fook and Taiwan banking group Fubon each committed $30 million.

Including the 15% greenshoe the deal will account for 25% of the issued share capital and if the shoe is exercised in full, the IPO size could increase to as much as $1.56 billion. At the current size it ranks as the fourth largest IPO in Hong Kong this year after ABC, AIA and Chinese shipbuilder China Rongsheng Heavy Industries, which raised $1.8 billion ahead of its listing last month. In terms of new Hong Kong listings, it looks likely to also be overtaken by construction machinery manufacturer Changsha Zoomlion Heavy Industry Science and Technology, which is currently on the road with a share sale of between $1.57 billion and $2.1 billion. However, Zoomlion, which is set to price its offering on Friday, is already listed in Shenzhen so technically that counts as a follow-on rather than an IPO.

Formed through a merger of 38 rural credit cooperative unions at the county level with Chongqing Rural Credit Cooperative Union and Chongqing Wulong Rural Cooperative Bank in mid-2008, CRCB still has a lot of exposure to the rural areas of Chongqing, where the potential for higher growth through increased lending is high. On the other hand, a large proportion of CRCB’s loans are to small and mid-sized enterprises (85%), which tend to be lower in quality and have a tendency to see greater deterioration during economic downturns.

The municipality of Chongqing has about 30 million people and plans to increase its urbanisation rate to 70% by 2020 from 51.6% now. The city is well placed to benefit from economic rebalancing via urbanisation, industrialisation and economic growth and syndicate analysts refer to CRCB as “a concentrated play” on this theme.

Among the key risks, CRCB’s short operating history in its current form means the management has a limited track record and investors had to decide whether they felt it is up to the task of delivering increased cost efficiency and making the most of the growth opportunities. The successful IPO indicates that, for now at least, investors believe it is.