Postal Savings Bank of China IPO goes over like a wet firecracker

This is the world's largest IPO in two years
This is the world's largest IPO in two years

It may have been the world's largest initial public offering (IPO) in two years, but shares of Postal Savings Bank of China (PSBC) hit the Hong Kong market like a wet firecracker on Wednesday.

The shares closed at 4.77 Hong Kong dollars ($0.62), just smidgeon higher than their HK$4.76 IPO price, which Reuters reported was itself at the bottom of the HK$4.68-HK$5.18 marketing range. The stock traded in a very tight range all day.

It was a wet performance after PSBC raised $7.4 billion in the share sale, making it the largest IPO globally since internet giant Alibaba raised $25 billion in 2014.

But analysts noted that even at the low end of the pricing range, PSBC's shares had a top-heavy valuation at a bit above book value, compared with other mainland banks priced at around 0.8 times book value.

Additionally, six cornerstone investors snapped up 77 percent of the shares. While those investors won't be allowed to sell for six months, that created an overhang of potential selling when the lockup period expires on shares of China's sixth-largest bank, which has around a half-billion Chinese customers.

Soros Fund Management may have been among the institutional investors. Chinese business magazine Caixin reported, citing sources with knowledge of the investment, that the asset management company founded by storied billionaire investor George Soros had subscribed to the IPO. A representative for George Soros didn't immediately return an email requesting comment sent outside office hours.

Dickie Wong, executive director at Kingston Securities, said the stock was priced a little higher than he expected.

"In terms of clientele base and its branches, it's definitely the largest state-owned bank in China, but when we talk about the bricks-and-mortar business model, it's simply not up to date," he told CNBC's "Squawk Box."

He noted that not only did the stock lack much differentiation with a lot of other mainland banks listed in Hong Kong, its valuation was higher, "so why buy," he asked.

"I think it will just stay at the IPO price. This is what they can do given that they have a lot of cornerstone investors," he said, noting he expected the stock to find support, but not a big boost, from its likely inclusion in Hong Kong's H-share stock index.

Others hadn't expected anything other than a lackluster first day.

"It's already maybe a little bit better than what I'd expect," Ivan Li, head of research at Sinopac Securities, told CNBC's "Street Signs" on Wednesday. "It's a megabank. It's a big bank and the banking industry in China is pretty overmature. So I think it's quite expected that such an IPO would not have an exciting performance."

Why did Postal Savings debut flat on the HKEC?
Why did Postal Savings debut flat on the HKEC?

He noted that the bank also wasn't particularly efficient, with a high cost-to-income ratio, although that also meant it had room to improve.

But Li wasn't very concerned about what would happen to the stock once the lockup period expired and cornerstone investors would be able to sell.

"They can wait. They have patience and the market turnover should be large enough to let them try to exit that slowly," he said.

Another factor that may be dampening the IPO: The outlook for the bank may not be as rosy as it appears on first glance.

"It's deposit funding cost is the lowest among the big state banks, but around 80 percent of the deposits come from its so-called agency model," noted Leon Qi, head of research for China financials at Daiwa Capital Markets.

Frederic J. Brown | AFP | Getty Images

"The branches are run by its parent, the China postal group. But this bank needs to pay an agency fee to the group to get the deposit. If we factor in this agency fee, the actual NIM [net interest margin] is actually thinner than some major competitors."

Qi was also concerned about how quickly PSBC has been growing.

"When we look at the loan growth of Postal Bank in the past few years, it is always above 20 percent and in some years it's above 30 percent and that implies the capital consumption," he told CNBC's "Capital Connection" on Wednesday.

"Given most of its operation is in the rural areas or low-tier cities in China, they don't have a sizable fee income in their operating income. That's why this bank's growth model is reliant on the balance sheet expansion, which is not very ideal in the current macro situation in China," he said.

If that continues, Qi expected that in a few years, PSBC would need to raise more capital, something that would rain on the stock price in the longer term.

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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1