When the Chinese government plunked down $22.5 billion three years ago to help recapitalize Bank of China, skeptics wondered if Beijing was throwing good money after bad. The bank’s hugely successful initial public offering of a 10.5 percent stake early this month silenced most doubters. The $9.73 billion IPO set a record for China, and the Hong Konglisted shares surged 15 percent on the first day of trading, buoyed by heavy retail demand.
“It has vindicated the government’s action,” says David Chin, one of the lead bankers at UBS, which led the offering in conjunction with Goldman Sachs and BOC International. Beijing, he adds, “is now holding 70 percent of a $90 billion bank, so its stake is worth almost three times the value it put in.”
Chin contends that investors bought Bank of China as a play on China’s extraordinary economic growth story. The bank, the country’s second largest, forecasts a profit of 33 billion yuan ($4.1 billion) for 2006, up 27 percent from the 25.9 billion yuan profit it earned in 2005. Personal banking generated 38 percent of profits, up from 13 percent in 2003, while the bank’s operations in Hong Kong and Macao contributed 41 percent.
The big question for investors is whether Bank of China, like the country’s other big banks, is making better loans today than it did in the past. The bank reported that bad loans fell to 4.9 percent last year from 5.5 percent a year earlier, but BoC’s own prospectus says its employees were allegedly involved in criminal conduct in 75 cases involving a combined $151 million in 2005.
Flavia Cheong, Singapore-based senior fund manager at Aberdeen Asset Management, avoided the IPO. She welcomes the bank’s moves to take loan-approval power away from county-level branches, where several fraud scandals originated, but cautions that “it will take time for this process to work effectively.”
The April resignation of American Lonnie Dounn, who early last year became the first foreigner to be appointed BoC’s chief risk officer, underscores the complexity of changing the bank’s historically lax credit controls. “The Chinese cannot prove that they have the skills to run their banks in a more commercial way,” says Philippe Delhaise, who heads Hong Kongbased risk management consulting firm Capital Information Services. “I’m not saying they can’t do it, but there is no evidence it can happen.”
Still, an investment banker involved in the listing downplays the significance of Dounn’s resignation and says it did not faze investors, who “understand that change in risk management systems in China is a multiyear, multiperson process.”
