China Merchants Bank (CMB), the mainland's sixth-largest lender, is expected to launch its US$2-billion Hong Kong initial public offering (IPO) this month and start trading its shares next month, according to sources.

 

The lender, already listed in Shanghai, will face a Hong Kong Stock Exchange hearing on Thursday. If it gets the green light, the bank would begin marketing its IPO and launch its roadshow, sources said.

 

Industry insiders said over the weekend that the China Securities Regulatory Commission had given the nod last week to CMB's plans for an overseas listing.

 

The CSRC approved CMB to sell up to 2.53 billion shares in Hong Kong, or 17 percent of the company's enlarged share capital, which is estimated to be worth US$2 billion.

 

Marketing of the IPO is expected to begin in the week of August 21, with the roadshow due to start early next month. China International Capital and JP Morgan are the IPO's underwriters.

 

However, CMB wants to avoid competition with larger rivals. Bank of China launched its US$9.7-billion deal in June and the Industrial and Commercial Bank of China is expected to float shares worth US$21 billion in Hong Kong and Shanghai in October.

 

"I think CMB will price its shares at 2.4 times its projected earnings," said Andes Cheng, an analyst with Hong Kong-based South China Research Ltd.

 

That will be on a par with three Hong Kong-listed mainland banks. They are now trading on an average price-to-earnings ratio of 2.5 percent.

 

CMB currently has 79,000 high-end customers with deposits exceeding 500,000 yuan (US$62,500). The lender has issued 6.5 million credit cards, accounting for about 30 percent of the mainland's credit card business.

 

Citigroup analyst Tracy Yu forecast that the bank's earnings would increase this year by 46 percent to 5.47 billion yuan (US$684 million), and rise by a further 28 percent to 7 billion yuan (US$875 million) in 2007.

 

CMB's loans grew 17 percent year-on-year to 5.165 billion (US$684 million) in the first half of this year, while its capital adequacy ratio dropped to 8.4 percent from 9.1 percent at the end of 2005.

 

A Hong Kong listing could help CMB boost its capital base, said Yu. "Merchants Bank is the highest-quality bank on the mainland, with the clearest strategy, and the strongest combination of a consumer franchise and product market positioning," said Yu.

 

Louis Wong, director of Philip Asset Management, added: "The banks' strengths are its customer services and low gearing ratio."

 

"But the scale of its business is relatively small, only covering 30 mainland cities. In addition, it's not that strong in terms of consumer financing. This lender still has room for improvement."

 

After CMB and the Industrial and Commercial Bank of China, more mainland lenders will seek listings in Hong Kong, said Patrick Yiu, associate director of CASH Asset Management.

 

"H-share listings have become a trend for mainland banks," he said, adding that smaller lenders are now expected to follow suit.

 

"However, they will not flock to the Hong Kong stock exchange overnight. It takes time for them to get their books in order before submitting applications to the regulator," said Yiu.

 

(China Daily August 15, 2006)