Bank of China has turned itself into the first port of call for western investors seeking exposure to one of the most exciting financial services sector growth stories in the world. The bank lays China’s most convincing claim to being a world-class institution.
Bank of China’s initial public offering (IPO) in Hong Kong in May raised $11.2 billion, with a 15% first day premium, making it the world’s fourth-biggest IPO ever, which confounded pessimists who had feared markets’ appetite wouldn’t stretch that far. The bank raised a further $2.5 billion on the Shanghai stock exchange in July. The offerings followed last year’s purchase of an 8.25% share in the bank by Royal Bank of Scotland.
“The market votes with its money,” Zhu Min, executive assistant president at Bank of China tells Emerging Markets in an interview. “Investors are banking on Chinese growth, and the banking sector is a proxy for the economy. They believe we have a sound business model, and we can pursue long-term growth.”
Bank of China’s first-half results did not disappoint: strong growth in demand for loans and wealth management services, driven by the continuing increase in incomes, produced a 28% year-on-year gain. By the end of August the stock was up 13.9% in Hong Kong since its debut, and 6.8% in Shanghai since the launch there.
The state-controlled bank benefits generally from China’s domestic growth, and specifically from government measures to channel more of the nation’s estimated $1.9 trillion in household savings into stocks and bonds.
Its international network gives it an edge: it has 600 overseas branches, about five times more than its larger rival, the Industrial & Commercial Bank of China. The Hong Kong unit – which is the city’s second-biggest bank, and earns handsomely from stock broking and wealth management fees – accounted for 37% of total profits in the first half of 2006.
Investors in Bank of China have not been deterred by corruption issues or an oversize batch of non-performing loans. Fraud cost the banking system $95.9 billion last year, according to China’s banking regulator, and Bank of China had more than its fair share. Investigations in 2003 led to the bank’s former president being jailed, and now two former managers are on trial in the US on racketeering and money-laundering charges related to an alleged theft of $485 million.
The government gave the bank a $22.5 billion bailout in 2003 to clear up bad loans, and since then they have fallen from 22% of the total to 4.19% (at the end of June). But that’s still higher than China Construction Bank Corp (3.5%) or the Bank of Communications Ltd (2.11%), Bloomberg news agency reported.
Going forward, Bank of China shares the systemic risks of all the country’s financial institutions: the non-performing loans are part of a pattern in which banks are overvalued and could suffer if the economic slowdown is faster or bumpier than hoped. —Simon Pirani