ICBC said to have mandated four banks for follow-on

Industrial and Commercial Bank of China has mandated BNP Paribas, BOC International, UBS and its own investment banking arm, ICBC International, for its upcoming H-share follow-on offering, according to several sources. However, a representative for one of the banks noted that ICBC hasn't made an official announcement yet, which means the line-up could potentially change.

The deal is expected to come after Agricultural Bank of China's massive initial public offering of up to $30 billion, which now seems to be set for June or July. ICBC's deal may raise up to $12 billion based on yesterday's closing price, although obviously the new shares will be issued at a discount to the prevailing market price. The bank has earlier said it may sell up to 20% of its outstanding H-share capital in the form of new shares -- the maximum allowed under a general mandate -- and given the general need for capital among China's major banks it is expected to utilise as much of that mandate as possible.

The share sale, or rather the general mandate to issue new H-shares, is subject to shareholder approval at the annual general meeting to be held on May 18.

The line-up of banks that have supposedly been mandated for the sale includes some surprises, most notably the selection of BNP Paribas. The French-owned investment bank, which is mostly known more for its mid-cap China equities franchise, is not a common participant on deals of this scale and hasn't featured in the top-10 in the Dealogic's ECM league tables for Asia since 2007, when it ranked ninth.

However, the hiring of China veteran banker Margaret Ren in August last year seems to have propelled BNP into a contender alongside the top-tier banks -- at least when it comes to the pitch part of the process. Ren joined BNP as chairman and CEO of corporate finance for Greater China about three months after she left Merrill Lynch where she was chairman of the China investment banking business. The daughter-in-law of former Chinese premier Zhao Ziyang, Ren has well-established relationships among China's major state-owned enterprises and the government. She has a reputation as one of China's better connected bankers and deal rainmakers, but after being the subject of an inquiry by US regulators in 2004-2006, which cleared her from any wrongdoings, her achievements have attracted less attention in the press.

At first glance, it is also surprising that Goldman Sachs isn't among the banks that will be arranging what could be one of the largest placements in a Hong Kong-listed stock this year, especially in light of Goldman's strategic alliance with ICBC. The US bank also owns just over 16% of ICBC's H-share capital.

However, sources said last night that ICBC, which is the largest bank in the world in terms of market capitalisation, had deliberately chosen not to mandate any of the banks who will be working on the H-share portion of Agricultural Bank of China's IPO. Aside from Goldman, this also ruled out China International Capital Corp, Deutsche Bank, J.P. Morgan, Macquarie and Morgan Stanley.

In light of this, it is no surprise that UBS has been mandated. Aside from not being conflicted by the Agricultural Bank IPO, the Swiss bank has a strong China franchise and was involved in a couple of the large block trades for China's top banks last year.

Notably, ICBC has mandated no US banks for its upcoming share sale. One possibility would have been Citi, which so far hasn't been mandated on any of the upcoming fundraisings for Chinese banks. And another would have been Bank of America Merrill Lynch. The latter is mandated for Bank of China's upcoming H-share sale together with BOCI, CCB International, Credit Suisse and ICBC International, but that was apparently not a reason for disqualification (BOCI and ICBCI are mandated for both BOC and ICBC).

BOC is widely expected to be the first among China's top banks to raise funds in the international equities markets, followed by Agricultural Bank's IPO and ICBC's follow-on. China Construction Bank also plans to tap the markets through a rights issue of up to Rmb75 billion ($11 billion) as per an announcement earlier this month. The deals are not expected to overlap as the government would want to ensure "an orderly sell-down", bankers say.

Like ICBC, BOC has earlier said that it intends to sell new shares equal to as much as 20% of its H-share capital to boost its core capital ratio. At current prices the sale could total about $8 billion. While initially intended to be a follow-on, recent market talk has suggested that the bank may do a rights issue instead in order to limit the dilution for existing shareholders.

In addition, BOC and ICBC have both flagged the possibility of also selling yuan-denominated bonds that can be converted into their respective A-shares. BOC has said it may sell Rmb40 billion ($5.9 billion) of CBs, while ICBC has said it may sell up to Rmb25 billion ($3.7 billion) worth. Both banks may also sell straight equity in the A-share market.

The Chinese banks need fresh capital after an unprecedented credit binge last year and to ensure they can continue to grow their loan books and still adhere to the government's capital requirements. At the end of the first quarter, ICBC had a capital adequacy ratio of 11.98% and a core capital adequacy ratio of 9.5%. This was down from 12.36% and 9.9% at the end of December, although both measures still met the regulatory requirements.

ICBC's Hong Kong-listed shares have fallen 11.1% from a three-month peak of HK$6.30 on April 9, about a week after it announced the share sale plans. The shares closed at HK$5.60 yesterday.