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Chinese Bank Sets Stage for Record Offering

The marketing for the stock listing of Agricultural Bank of China kicked off on Thursday, setting the stage for what could be the biggest initial public offering the world has seen.

Agricultural Bank, a behemoth with 350 million customers and 24,000 branches that is focused on rural lending, is preparing a dual listing in Hong Kong and Shanghai next month.

From left to right, Pan Gongsheng, executive director Agricultural Bank of China (AgBank), Zhu Hongbo, vice president, Zhang Yun, vice chairman, Xiang Junbo, chairman and executive director, Yang Kun, executive director and Guo Haoda, executive vice president attend a photo call in Hong Kong.
Mike Clarke | AFP | Getty Images
From left to right, Pan Gongsheng, executive director Agricultural Bank of China (AgBank), Zhu Hongbo, vice president, Zhang Yun, vice chairman, Xiang Junbo, chairman and executive director, Yang Kun, executive director and Guo Haoda, executive vice president attend a photo call in Hong Kong.

The exact pricing for the shares is due to be announced around July 7, with a trading start about 10 days later. But the range now being proposed to investors indicated that the listing could raise as much as $25 billion.

That would make the long-awaited I.P.O. significantly larger than that of Industrial & Commercial Bank of China, another state-controlled Chinese bank, which raised $21.9 billion in October 2006.

A price at the lower end of the proposed range could well see the total amount fall short of that record. But even then, the huge transaction would still underscore just how rapidly China has emerged as a source of new listings, even in the midst of challenging market conditions.

Global stock markets remain deeply nervous about Europe’s debt woes and the timid pace of economic recovery in the United States and Europe. And in China, investors are wary of the government’s efforts to dampen the red-hot pace of economic growth. As a result, the Shanghai composite index has declined more than 20 percent in 2010, making it one of the world’s worst performers so far this year, along with Greece.

The Agricultural Bank listing is also defying deep-seated concerns among analysts about the long-term quality of the loans held by Chinese lenders.

Much of the country’s banking sector is well capitalized. But a lending splurge aimed at bolstering the economy during the global downturn last year raised concerns that many loans might ultimately turn sour.

Commenting on Agricultural Bank in an interview in Hong Kong on Wednesday, Charlene Chu, Fitch Ratings’ senior analyst for the Chinese banking sector, said: “This is a bank that only released audited results for the first time ever last year.” Like other state-owned banks prior to their I.P.O.s, Agricultural Bank has had “massive historical asset quality problems,” Ms. Chu said. This, combined with its sprawling branch network and larger share of operations in China’s smaller cities and towns, means that it faces more operational challenges than its peers.

“I think there could be a lot of risk going in as equity investors in AgBank,” she said. “The government can and most likely will provide help if loans turn bad. But such support would dilute equity investors, and cannot prevent share prices from falling.”

Nevertheless, shares of large Chinese offerings like those of Agricultural Bank have become a must-have for international investors who want to have exposure to the booming Chinese economy.

Reflecting the intense appetite for Chinese assets, Agricultural Bank has secured several high-profile investors, including sovereign investment funds from the Middle East, which that have agreed to take a total of about $5 billion of the bank’s stock, according to a person with direct knowledge of the transaction, who declined to be identified because the information had not yet been made public.

Agricultural Bank, based in Beijing, is the last of the four biggest state-owned lenders to stage an I.P.O.

It is selling 25.4 billion shares in the Hong Kong portion of the issue, at a price of between 2.88 Hong Kong dollars to 3.48 Hong Kong dollars a share, the person said. The upper end of that range, equal to $0.45, would generate $11.4 billion — or as much as $13.1 billion if strong demand allowed more shares to be sold in a so-called overallotment option of up to 15 percent.

The Shanghai portion involves the sale of 22.2 million shares.

The state-run China Daily cited unnamed sources Thursday as saying that those shares would be priced between 2.7 renminbi and 3.3 renminbi, or $0.48. The Shanghai portion of the sale, if it also included an overallotment, could yield as much as $12.3 billion.

Agricultural Bank could not be reached for comment on Thursday.