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China's AgBank offers room for improvement

China's AgBank on track for record IPO after pricing shares
Hong Kong (AFP) July 9, 2010 - Agricultural Bank of China is on course for a record 22.1 billion US dollar initial public offering after pricing its Hong Kong shares, reflecting continued investor confidence in China. The bank on Friday priced its shares in the Hong Kong portion of the IPO at 3.20 Hong Kong dollars (41 US cents). Assuming an over-allotment option is exercised, the dual Hong Kong-Shanghai listing should outpace Industrial & Commercial Bank of China's 21.9 billion dollar offering in 2006. "The offer price for the global offering has been determined at 3.20 Hong Kong dollars per H share," the bank said. AgBank -- the last of China's Big Four banks to list its shares -- said on Wednesday it had raised 68.5 billion yuan (10.1 billion US dollars) from the Shanghai portion of its monster IPO.

AgBank's Hong Kong sale drew almost a dozen heavyweight investors, including Qatar's sovereign investment fund, British bank Standard Chartered and Hong Kong's richest tycoon Li Ka-shing. Further details, including whether the offering has set a new record, will likely not be confirmed until next week, a bank spokesman said. "If you need any evidence where the future of capital markets" lies, "it is the Agricultural Bank of China set to announce a record amount raised in an IPO," the Royal Bank of Scotland said earlier. "European banks could only dream of raising this much capital at the moment." AgBank in recent weeks scaled back its original 30-billion-dollar IPO target amid market volatility tied to concerns about the global economy and questions about a balance sheet dented by bad loans.

Some analysts consider the rural lender to be the weakest of China's big banks owing mainly to its bad-loan burden and a mandate to loan money to poor farmers instead of focusing on higher-profit areas. But AgBank chairman Xiang Junbo said last month the company was poised to capitalise on Chinese government efforts to boost economic growth in the country's centre and west, which have missed out on the export-driven boom enjoyed by coastal regions. "The county area business will be one of our key profit drivers," Xiang said. The lender's stock is set to begin trading in Shanghai on July 15, and in Hong Kong a day later. AgBank is the only company set to debut next week either on the Shanghai stock exchange or its counterpart in the southern industrial boomtown Shenzhen, said Qiu Yanyin, a Shanghai-based analyst with TX Investment Consulting Co.

"There are no new listings next week. It's hard to speculate whether it's the regulators' intention, but I think it's not something unique to China," Qiu told AFP. "Firms may not want their debut to be overshadowed by a big company." Jonathan Siu, analyst at Core Pacific-Yamaichi in Hong Kong, said he expected the Hong Kong shares to rise as much as 10 percent on their debut. "Market sentiment has been weak, but I think it will improve," he told AFP. "There is room for probably a five to 10 percent rise." AgBank will also offer Japanese investors a portion of its shares ahead of its listing, Nomura Securities, one of the two lead underwriters in Japan, said this week. Citing an unnamed source, the Nikkei business daily reported that AgBank hoped to raise up to 50 billion yen (570 million dollars) in Japan The lender, which was set up in 1951, two years after Mao Zedong's communist revolution in China, said it had booked a profit last year of 65 billion yuan, up from 51.45 billion yuan in 2008.
by Staff Writers
Hong Kong (AFP) July 9, 2010
Agricultural Bank of China's huge share sale this week underscores investor confidence that the country's so-called economic miracle is set to continue.

But it also highlights what may be the lender's biggest challenge: to book ever-increasing profits while fulfilling its mandate to help bridge the yawning gap between urban and rural economic prosperity.

AgBank -- on track to set a record, 22.1-billion-US-dollar initial public offering ahead of its dual Hong Kong-Shanghai listing this week -- was founded two years after Mao Zedong's 1949 communist revolution to lend money to China's poor farmers and distribute state money in rural areas.

But heavy exposure to China's poverty-stricken interior meant its mission was frustrated by decades of chaotic policies, leaving the bank awash with bad debt and with a reputation as the weakest of China's major state lenders.

AgBank, which has about 24,000 branches, mostly in China, and more than 320 million customers, has said it expects 2010 net profit to rise at least 28 percent year-on-year to 82.9 billion yuan (12.2 billion US dollars).

Its bad debt ratio dropped from 4.32 percent in 2008 to 2.91 percent in 2009, although observers say that figure is far higher than its rivals, with the company earning more than a quarter of its revenue from rural banking.

The return on capital from rural loans is typically 20-30 percent less than from urban loans, as the size of the rural loans is generally smaller and monitoring costs higher than urban ones.

Spearheading government policy has also left AgBank poorly equipped to meet strict capital requirements, observers said.

"It is generally considered the worst of the Big Four banks," Francis Lun, general manager of Hong Kong's Fulbright Securities, told AFP. "The only advantage is that there is lots of room to improve."

In the past decade, Beijing began shoring up the state-owned bank's position with AgBank chairman Xiang Junbo vowing last month to pound its balance sheet into shape -- much like Industrial & Commercial Bank of China did after its record 21.9-billion-US-dollar listing in 2006.

"There may be some slowdown in China's economic growth, but it won't be a hard landing," Jonathan Siu, an analyst at investment bank Core Pacific-Yamaichi in Hong Kong, told AFP.

"And the banking sector should perform very well so there is potential for (AgBank) to have better earnings."

AgBank's Hong Kong sale -- which drew almost a dozen heavyweight investors, including Qatar's sovereign investment fund, British bank Standard Chartered and Hong Kong's richest tycoon, Li Ka-shing -- came amid choppy markets weighed down by concerns about the global economy.

The giant sale reflected a continuing shift in investor sentiment towards China's growth story, Royal Bank of Scotland said in a research note earlier.

"European banks could only dream of raising this much capital at the moment," it said.

AgBank's mandate to focus the core of its business on rural lending is not necessarily a disadvantage, Siu added.

"There are lots of opportunities. The government wants to boost loans in rural areas and that is AgBank's focus," he said.

AgBank's chairman echoed that sentiment, saying last month the company was poised to capitalise on Chinese government efforts to boost economic growth in the country's centre and west, which have missed out on the export-driven boom enjoyed by coastal regions.

"The county area business will be one of our key profit drivers," Xiang said in June. "(AgBank) is well positioned to capitalise on China's next wave of growth."

But Xiang last year said AgBank's mission would make convincing investors of its money-making potential a tough sell, and made his job "three times as busy" as his counterparts at rival banks.

"Making money and fulfilling social responsibility is like balancing the co-existence of water and fire," he was quoted as saying by the Wall Street Journal in 2009.

"A strong management system can serve as an iron pot to transmit the heat from the fire to boil the water."

But the decades-old rural policy could fade into history after AgBank becomes a listed company with a new mandate to drive profits, Lun predicted.

"I think (AgBank) will junk that policy and become more like a commercial bank."




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