The Ups and Sobering Downs of World's Biggest IPO
Investors will be watching very closely as China announces the final details of the world's biggest stock offering on Wednesday, June 9th. The historic offering will launch shares of Agricultural Bank of China Ltd., the last of China's four giant banks to go public. The initial public offering is expected to raise nearly $30 billion in Shanghai and Hong Kong. Western investors can easily buy shares on the Hong Kong exchange.
The bank says it will allocate more than half of its offering, or 30 billion shares, on Hong Kong Exchange and 45 percent of the offering, or 25 billion shares, on the Shanghai Stock Exchange. Shares should be priced at approximately fifty cents each. (The world's largest previous IPO was the $22 billion launch of its state-owned peer, Industrial & Commercial Bank of China Ltd. in 2006.)
What's attractive about Agricultural Bank of China? Lots and lots of customers. Agricultural Bank had an army of 320 million customers in China at the end of 2009. It blankets the nation's rural regions with more than 23,000 outlets, according to the bank's prospectus.
The bank boosted its profitability by more than 25 percent to $9.5 billion last year. It forecasts net income will rise to at least $12.13 billion in 2010.
Agricultural Bank's net income rose by an impressive 38.5 percent in the first quarter of 2010 compared to the same period a year ago. The bank has a capital adequacy ratio of 10.07 percent and its non-performing loan ratio stands at 2.91 percent.
Like all of China's major banks, Bank of Agriculture received a major injection of capital and relief from many of its non-performing loans as it prepared to go public. Bank of Agriculture was in the worst condition of any major Chinese bank because it had acted as an arm of the government, making mandated loans to support poor rural areas.
Although the bank now appears to be relatively healthy, there are good reasons to be wary of this IPO. All of China's banks are expected to experience an increase in non-performing loans as Beijing clamps down on the runaway real estate market. The big three national banks of China have been forced to raise their reserve ratios three times this year and are going to market with bond offerings to raise capital. It is not a promising environment for the IPO of a bank with a troubled history.
The bank says it aims to maintain a minimum capital adequacy ratio of 11.5 percent over the next two years. According to its prospectus, Agricultural Bank had $606 billion worth of outstanding loans at the end of 2009.
What quality will the bank's new loans be? It's important to note that despite the size of the IPO, the state will still hold approximately 85 percent of Agricultural Bank's shares. That means the government maintains a controlling interest.
Agricultural Bank's IPO was delayed due to disagreements in Beijing about the mandate that the bank would operate under. Some officials thought the lender should be a purely commercial entity, but others argued that it should remain a policy-driven lending arm of the government.
The bureaucrats won that argument. As a condition of the bank's bailout, the government insisted that the Agricultural Bank should continue to support farmers, agricultural businesses and rural infrastructure. This is the least profitable and highest risk part of China's banking business.
China's rural areas are increasing in prosperity and the bank can reach a customer base of almost 700 million people. Agricultural Bank's long term outlook may be positive. But it seems wise to wait out the IPO and see how the bank performs over the long run under its government mandate.