China Bohai Bank bolsterscapital cushion

money-glitz | Stella Zhai 29 Jun 2020

China Bohai Bank, a mainland medium-sized lender backed by Standard Chartered (2888), is seeking an initial public offering on the Stock Exchange of Hong Kong to raise around US$2 billion (HK$15.6 billion) as a capital supplement.

The Tianjin-based bank will open retail book tomorrow.

IPO markets in both mainland and Hong Kong have been silent for bank candidates so far this year, compared with eight listings in 2019. And this comes as mainland regulators require lenders to give up a part of their profit to support economic activities in the aftermath of the coronavirus pandemic, while the listing review is expected to be tighter after serious credit risks have arisen among small-and medium-sized lenders like Baoshang Bank and Bank of Jinzhou (0416).

Founded in 2005, the bank attracted Standard Chartered as its second-largest shareholder in 2004 to own 19.99 percent of its shares, the first nationwide joint-stock commercial bank in the mainland to introduce a foreign strategic investor at the stage of establishment.

Meanwhile, a local state-owned company, a group of central state-owned enterprises and private companies take 25 percent, 37.01 percent, and 18 percent stakes, respectively.

The bank, one of the only three unlisted nationwide joint-stock commercial banks among 12 of its kind, had expanded its registered capital for a third time last year, adding the amount from 8.5 billion yuan to 14.45 billion yuan (HK$15.82 billion) before applying for a Hong Kong IPO.

Bohai ranked 178th among the "Top 1000 World Banks" released by The Banker magazine under Financial Times, ranking 27th among all mainland banks, in terms of tier-one capital as of the end of 2018.

The bank recorded net profit growth of 15.7 percent from a year ago in 2019, representing a weighted average return on net assets of 13.7 percent, which ranked first and third, respectively, compared to all its listed peers, it says.

The bank's total assets reached 1 trillion yuan in 2017 for the first time, 11 years after its establishment, and the last one among its peers.

The proportion of operating income from its corporate banking business has been reduced from 54.4 percent in 2017 to 43.9 percent last year, while that of the retail banking segment had grown from 8.1 percent to 19.3 percent during the period.

As of the end of 2017 and 2018, the bank's core tier-one capital adequacy ratio was 8.12 percent and 8.61 percent, respectively, while the ratio dropped to 8.06 percent, as of the end of 2019. Its non-performing loan ratio was narrowed from 1.84 percent at the end of 2018 to 1.78 percent ended last year.

It is noticeable that the majority of the bank's deposits are from corporate customers, which accounted for 80.7 percent and 67 percent of total deposits, respectively, as of the end of 2017 and 2018. In contrast, personal deposits only took 4.5 percent, 5.8 percent during the same period, respectively. This had led to a drop in the bank's net interest spread from 1.6 percent in 2017 to 1.46 percent in 2018, as the interest rate for corporate deposits is higher than that for individual customers.

But net interest spread had grown to 2.03 percent last year driven by the increasing proportion of personal loans in its asset structure, which had relatively high yields, as a result of a transforming strategy into a retail bank.

The bank has also issued certificates of interbank deposit in a total principal of over 155 billion yuan and financial bonds of 18 billion yuan so far this year, which equals to around 88 percent of the total debt securities issued last year. It is also allowed by regulators to issue financial bonds of a total principal amount of 10 billion yuan, the proceeds of which should be used to grant loans to micro and small enterprises, it says in the prospectus.

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